No tax avoidance, no money whitening under new CGT rules: Chairman SECP

Chairman Securities and Exchange Commission of Pakistan (SECP) Muhammad Ali said on Wednesday that the Federal Board of Revenue (FBR) has fully endorsed all proposals of the commission on the revamped Capital Gains Tax (CGT) regime for the stock market and there was no possibility for using it for tax evasion or money whitening.
Addressing a news conference, chairman SECP said the revision in CGT regime was accepted by FBR as it was finalised in consultation with all the stakeholders. He said the scheme will help in documentation of the money invested in stock markets, which would help in stopping tax evasion. It would also help in capital formation for the businesses. He said some of the procedural changes were being worked out along with up gradation of automation as new rules would be implemented from April 1, 2012. Chairman SECP also announced the commission plans to establish two more commodity exchanges in the country to promote transparency and fair practices in the commodity trade. He said commodity exchanges were needed to develop the future markets in country and it would be beneficial for the growers and the consumers. He said SECP was studying regulations if regulated spot markets to trade in agriculture products could be established. He explained that currently, the commodity spot markets and wholesale markets were established by the provinces, and these markets lack regulatory framework to protect the rights of growers. He said commodity exchanges were at an evolution stage and it would take time to make them well regulated. However, he said there was no plan to increase the number of stock markets.
CGT: He said since 1974 till June 30, 2010, CGT was exempted, even though the requirements for filing tax returns were in place. However, these were neither followed by the participants of the capital markets nor implemented by FBR. This resulted in a peculiar anomaly in the shape of the investors making legitimate, but undocumented gains accrued through transactions in the capital markets during this period. He said the new CGT regime would help document it for the first time. Chairman SECP said measures have been taken to address issues and there would be complete due diligence of the investors as already SECP has tightened procedures. Ruling out any chance of misuse of the scheme for whitening of illegal money, he said a minimum holding period was under consideration. All transactions recorded by the national clearing agency would help stop tax evasion and tax avoidance.
CGT would be applicable only on profit made against the earlier practice of deduction in both cases of profit or loss. CGT rate has been frozen at 10 per cent on holding period of up to 6 months and 8 per cent on period less than 1 year till 2014. It will help bring investors back to the market. He said before imposition of CGT, tax collection from stock market was Rs5 billion per annum which drastically declined to Rs400 million in the last fiscal year.
He said any income earned through criminal activities was punishable under law including Anti Money Laundry (AML) Act. SECP proposal was made in view of the Know-Your-Customer (KYC)/Customer-Due-Diligence (CDD) requirements being expanded for stock exchange brokers. These requirements aim to deter money launderers and terrorist financiers from using the non-bank financial system for illicit purposes. Under these requirements, the brokers are to adopt reasonable measures to establish the source of wealth and funds for high risk customers. Furthermore, the scope of the scheme shall not give any exemption from the application of FATF recommendations.
Source of income exemption will only be available for funds which remain invested for a certain period. This will only bring money from investors who are familiar with the capital markets and willing to take the price risk as share prices can go down substantially. In addition to the holding period, weighted average of funds would be used. In this regard, discussions will be held with FBR to finalise the modalities. SECP had also proposed that CGT rate be frozen at the current rate applicable for ease of calculation and to bring back the investor confidence in the market. To simplify and ensure timely deposit of tax revenue, a centralised collection mechanism at NCCPL was recommended.
PMEX: Chairman SECP said globally commodities markets are one of the fastest growing segments of the overall capital market and the value traded on commodity exchanges is multiple of value traded on stock exchanges. The significance of the commodity exchange becomes even more vital in a primarily agricultural country like Pakistan. Enhanced activity in this market can benefit the whole agriculture value chain from farmers to policy makers. A comparison with international markets depicts that the Pakistani commodity market has still to go a long way in evolving and contributing towards the overall economic objectives. The traded value of the exchange-traded futures contracts was a mere $8.8 billion in Pakistan as compared to $2.9 trillion in India, $239 billion in Turkey and $5.3 trillion in China for the year end 2011. This clearly shows the limited penetration and outreach of the commodities market in Pakistan despite the immense potential.
Debt markets: About debt markets, he said SBP and SECP must join efforts to create a vibrant debt market in Pakistan. SECP had proposed that a joint committee be formed consisting of officials from SBP and SECP to work in close coordination with the objectives to carry out a holistic review of the debt market, identify problems and initiatives required at strategic and operational levels, formulate long term and short term roadmap for development of market and provide focal point for close coordination with the stakeholders to ensure smooth implementation of the measures taken.
With reference to further developing the debt markets, a meeting of the domestic Credit Rating Agencies (CRAs) was held at SECP, which was attended by a representative from SBP. In the meeting it was decided that a committee comprising officials of SECP, SBP and CRAs shall be constituted to look into the existing regulatory framework for CRAs in line with the international best practices; the existing regulatory framework for CRAs and their code of conduct; capital structure of CRAs and their listing on the stock exchanges; and establishing a Bond Pricing Agency (BPA).
He said a bond valuation agency, was also under consideration. It will act as an independent entity with the role to provide fair valuations of debt securities issued by governments and corporations based on comprehensive data collection, validation, pricing, and dissemination to the stakeholders.
Insurance sector: Regarding the developments in the insurance sector, he said SECP has approved the draft Takaful Rules. Takaful, the Islamic alternative to traditional insurance is a scheme based on the principles of mutual assistance in compliance with the provisions of the sharia and which provides for mutual financial aid and assistance to the participants in case of occurrence of certain contingencies and whereby the participants mutually agree to contribute to the common fund for that purpose.
Takeover regulations: With regard to the Takeover Laws, he said SECP had organised a roundtable meeting representatives of the corporate sector on proposed amendments to the 2008 Takeover Regulations. A final roundtable with the stakeholders is to be held in Karachi to finalise the matter.