TAX NEWS - June 2010
Capital Gains Tax: 'No MoU says CGT inapplicable on stocks bought before June 30'
He also confirmed that the capital gains tax (CGT) would be applicable on securities to be sold after July 1, 2010. Former Finance Minister and member of Senate from PML (N), Ishaq Dar, informed the Senate Standing Committee on Finance that Former Finance Minister, Shaukat Tarin, had called him and totally agreed with him on the applicability of CGT on stock market. Senator Ishaq Dar was of the view that Shaukat Tarin also supported the analysis of the committee that there should be no exemption from CGT on shares purchased on or before June 30, 2010.
At the end of the meeting of Senate Standing Committee on Finance on Monday, FBR Chairman told reporters that the shares/securities to be sold after July 1, 2010 would be subjected to the CGT. "There is no confusion about the interpretation of law for applicability of the CGT on stock exchanges. We are very clear on the issue of CGT on stock exchanges. As far as Memorandum of Understanding (MOU) is concerned, there is no such document signed between the Ministry of Finance and the Karachi Stock Exchange (KSE), which confirms that the CGT would not be applicable on securities purchased before June 30, 2010. Even if some kind of MOU has been agreed, it has specified that the CGT on stock exchanges would be applicable from July 1, 2010. However, the MOU has no legal status before the Parliament. Parliament is supreme and whatever it decides would be implemented", Sohail Ahmed said.
FBR Chairman categorically stated that the brokers have enjoyed CGT exemption for the last many years and now the same lobby is becoming active again to create confusion about the applicability of the CGT on stock exchanges. The estimated revenue projections of Rs 5 billion under the head the CGT has been worked out the basis of collecting the levy from securities being sold after July 1, 2010. FBR Chairman had informed the Senate Standing Committee on Finance that the CGT would be applicable on the disposal of securities from July 1, 2010. "I fully endorse the viewpoint of the Senate Committee because the legal status specified by the committee is the accurate interpretation of the law. My interpretation of the law is exactly the same as given by the committee. When officials of the Finance Ministry called me on the issue, the same legal interpretation has also been conveyed to them. Thus, we are crystal clear on the whole issue," he remarked.
He also clarified to the committee that an MOU has no status before the National Assembly/Senate. "I don't think that any such MOU has been dully signed between the federation and the stock exchanges. The KSE had issued a press release at that time, but no MOU was signed," Sohail Ahmed observed.
FBR Chairman further informed the committee that the FBR would soon submit a clarifying amendment before submission of the recommendations of the committee to clarify the whole issue pertaining to the applicability of the CGT on stock exchanges. Sohail Ahmed further assured the committee that the FBR would convene a meeting with the Karachi Stock Exchange within the described parameters for taxation of the capital gains. Senator Ishaq Dar reiterated that all the purchases of stocks are now documented with Central Depository Company (CDC) and the FBR should approach the Securities and Exchange Commission of Pakistan (SECP) and the CDC for obtaining necessary data on securities. This would ensure that nobody would be able to tamper the data pertaining to the holding period from the tax authorities. FBR Chairman further assured the committee that the FBR would obtain data from the CDC and the SECP for proper applicability of the CGT on securities.
The Senate Standing Committee on Finance highly appreciated the response of the FBR Chairman on the issue of taxation of CGT on securities.
It is important to mention that the whole issue was raised before the committee in its last meeting when Senators Ishaq Dar inquired about the status of securities purchased before June 30, 2010. FBR Member Direct Taxes Policy had said that the CGT on securities would be applicable on purchases made from July 1, 2010. The exemption to the capital gains tax on stock exchanges would be available to securities purchased before June 30, 2010.
According to the FBR, the exemption from tax on Capital Gains on sales of shares/stock/securities, allowed for the purposes of capital formation is due to expire on June 30 2010. Capital gains of sale of these stocks/shares/securities is proposed to be taxed from July 1, 2010. This tax is to be charged as under: Where holding period of a stocks/shares/security is less than six months, tax is to be charged 10 percent. Where withholding period of the stocks/shares/security exceeds six months but it is not more than a period of 12 months, tax is to be charged at the rate of 7.5 percent. Also, in order to cater to the capital formation needs, no tax is chargeable on capital gains arising from securities held for a period of over 12 months, FBR added.
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