Minister for Finance Dr Abdul Hafeez Sheikh Saturday agreed to the Securities and Exchange Commission of Pakistan’s (SECP) proposals on the rationalisation of controversial Capital Gains Tax (CGT) to revive the investors’ confidence at the country’s volumes-starved capital market.
Under SECP proposals taxpayers would be exempted from declaring his/her source of income till June 2014, withholding tax (WHT) on the turnover would be abolished, the current CGT rate would be frozen till 2016 and that the National Clearing Company of Pakistan Limited (NCCPL) under a revised collection mechanism would at source deduct the tax on capital gains directly. Further, besides allowing individual investors’ participation in the Margin Trading System (MTS) the apex regulator, by amending Securities (Leveraged Markets and Pledging) Rules 2011, allowed 15 per cent cash margin and 10 percent margin via eligible securities with immediate effect (from Monday).
Moreover, to enhance brokers’ capacity to execute business, SECP allowed each member of the three stock exchanges to do additional business against a specified collateral amount from their respective Clearing House Protection Funds.
The brokers at KSE would be allowed to do additional business by Rs50 million (each) against a collateral amount of Rs10 million. “This would increase the daily market capacity by around 150 million shares,” SECP chairman Muhammad Ali told a well-attended ceremony on “Serving Investors and Industry” held here at Karachi Stock Exchange (KSE) Saturday.
The NCCPL would manage the three Funds as separate pools for each Exchange. “I do accept these proposals and want the same be in operation from April 1,” the finance minister told the gathering. Federal finance minister also assured the SECP chief of his full support on the proposed demutualisaion of the country’s stock exchanges on the legislative front.
In his address, SECP chairman slammed the front regulators, the exchanges, for not playing their due role in proposing financial literacy which he said was the lowest in Pakistan. On SECP’s part, he said, a three-year Investors’ Education Plan was due to be approved next week.
Further, urging the need for “better surveillance” for investors’ protection, Ali said second phase of e-dividend was in the offing in collaboration with the Central Depositary Company while the NCCPL was developing “central data base” that would not only help the Exchanges ease out documentation process but also keep check on money laundering. “We expect this programme to finalise by the end of March,” the SECP chief said.
Commenting on the development, the analysts believe that by exempting the investors from declaring their source of income till 2014 the economic managers wanted to whiten their most-referred black money. “Afterwards that wealth would be treated as white,” said Khurram Schehzad, an analyst at InvestCap Research. SECP, however, says the exemption of CGT for a long period of 36 years, from 1974 to June 2010, had created a situation whereby the investors had earned legitimate but “undocumented gains”.
About the collection of CGT by the NCCPL, the analyst said it would help the taxpayer avoid the income tax officers. SECP decided to revamp the CGT after eventually realizing that maintaining status quo on the CGT was not in the interest of the economy as it had adversely impacted tax revenue collection as well as trading volumes at capital markets.
