Securities and Exchange Commission of Pakistan (SECP) has come up with various proposals to revamp the controversial Capital Gains Tax (CGT) in the country’s capital market where the apex regulator has eventually realised that the traded volumes and tax revenues have plunged to lowest levels during the past two years. The commission has observed that 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”. The apex regulator has recommended that the “unexplained incomes” or assets of the investors be deferred for funds invested in the capital market till June 30, 2014, after which the highest/peak value of an investor’s portfolio between now till then should be treated as income generated from the capital market and part of investor’s wealth.
The commission also recommended a centralised collection mechanism in National Clearing Company of Pakistan to simplify and ensure timely deposit of tax revenue. Freezing of the existing CGT rate has also been suggested by SECP to simplify calculation and achieve smooth implementation of the levy, dubbed by market observers as ill-thought-out. Further, the commission proposed that the applicability of Section III may be suspended from April 1, 2012 till June 2014. The regulators also recommended the documentation of the gains made outside capital market.
“Maintaining status quo on CGT is not in interest of the economy as it has adversely impacted tax revenue collection as well as trading volumes at capital markets,” SECP Chairman Muhammad Ali observed in a notice notified to the country’s stock exchanges on Friday. Karachi Stock Exchange, however, placed the notice on its website on Saturday. “Besides these, CGT has adversely affected investors’ sentiments, capital formation and overall functions of the capital market,” the commission conceded. The apex regulator, however, took more than two years in what it said, “objectively”, analysing the global trends on CGT and eventually found its adverse implications on securities trading after the levy was re-imposed on June 30, 2010 and given effect from July 1, 2010 after a gap of 36 years since 1974.
After holding deep deliberations with Federal Board of Revenue (FBR), the commission decided to revamp the levy that, the analysts agreed, had made the investors, particularly the retailers, flee the once most liquid stock market of Asia where the daily average trading volumes are currently staggering at a level as low as 30 million shares. “SECP has objectively analysed the situation by looking at the global trends, impact of CGT on CM and issues with the present CGT regions and is pleased to abort its proposal to revamp CGT regime in a manner which not only addresses issues highlighted above, but also meets overall objectives of FBR, SECP and capital market,” SECP said.
SECP said the levy was in place in Australia, Canada, Brazil, China, France and Germany, however, it encompassed all asset classes such as securities, immovable properties, collectibles and other personal assets. In developing jurisdictions, it said, tax’s applicability varies from jurisdiction to jurisdiction. “CGT regimes across the globe have evolved differently, as per each country’s political, fiscal and economic environment,” it added. SECP said that securities were usually brought under the CGT regime after a country achieved a certain level of capital market depth, investor outreach and adequate capital formation and documentation. In Pakistan, the regulator said, securities trading remained exempted from CGT for 36 years since 1974. “Implication of CGT on securities trading from July 1, 2010, has not only impacted tax revenues, but has also reduced average traded value to the lowest level during the last two years,” it conceded. SECP noted that CGT had also put adverse impact on the capital market in terms of price discovery, withdrawal of investors, business viability and capital formation and resource allocation. The recommendations, however, would take effect after approval of the key stakeholders that include SECP, FBR, stock exchanges, intermediaries and investors.
