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Pakistan Tax: Stock brokers ponder over Capital Gains Tax

Sullen-faced stock brokers — about a half of the 200-strong fraternity — assembled at the Karachi Stock Exchange on Monday afternoon to ponder over the implications of Capital Gains Tax (CGT) proposed in the Federal budget 2010-11 announced on Saturday.

The Stock Exchange even otherwise a noisy place, it is always difficult to discern coherence in various voices heard.
But the grudge of most members participating in the meeting, seemed to be centered on the timing of the imposition of Capital Gains Tax (CGT).

Abid Ali Habib, a sitting director on the board, airing his own views (and not necessary of the board) said most members argued that the new tax cannot have come at a worst time.

The volume of business at the KSE had shrunk to an average of 70 million shares, from 500 million two years ago; the stream of Initial Public Offerings (IPO) had almost dried up as entrepreneurs were reluctant to enter the market to mobilise resources. Besides, the number of investors in stocks had hugely shrunk. Global markets troubled by state debts were in a tailspin.

He said that modalities of the Capital Gains Tax (CGT) payment were yet to be understood, but members generally showed displeasure over the requirement to file quarterly statements and pay advance Capital Gains Tax (CGT) instead of assessment and payment on the net income at the end of the year.

Hasnain Asghar Ali, head of sales and research at Aziz Fida Husein & Co, added that the onus of filing of quarterly returns and payment of Capital Gains Tax (CGT) has been placed on the clients — and not the brokers — which would bring the former in unnecessary contact with the taxman, raising apprehensions of harassment, mainly in regard to the disclosure of sources of funds.

The government hopes to raise Rs50 billion from the levy of Capital Gains Tax (CGT), which members said was too optimistic a target.

The meeting was told that a representative of the Federal Board of Revenue (FBR) would visit the KSE next week and discuss members' reservations over the budgetary measures on stocks. A disconcerting issue raised by some big brokers was regarding the mode of payment of Capital Gains Tax (CGT) by the foreign investors and adjustment for currency depreciation.

The management agreed to the members' demand of looking into the Indian model of yearly payment, after seeking consent of foreign investors.

"Would the overseas investors otherwise want to enter into the hassle of payment of Capital Gains Tax (CGT) and documentation after every three months?" a broker asked.

Those toeing the official line argued that Capital Gains Tax (CGT) conformed to international best practices; provided transparency to source of funds and trading and was a necessary step towards market reform.

One broker on that side of the fence thought that it was too late for the brokers to raise hue and cry over the Capital Gains Tax (CGT) for the figures were already incorporated in the budget: "Of what use is it to close the stable door when the horse has bolted?", he asked. But another argued that it was still possible to block the levy before the budget was translated into Finance Bill 2010-11 by the Parliament.

"If the CVT — also an IMF prescription — could be deferred, why not the CGT?" he asked.

On another note, many brokers, including some of the stalwarts, also cried fowl over the Government and regulators' act of pushing aside the KSE demand of introduction of Margin Trading (the variant of the CFS MK-II or 'badla' shorn of its 21 identified defects) and according approval only to the Margin Financing.

"We had proposed three products of which two, the Margin Financing and Shares lending-borrowing were considered by the apex regulator, setting aside the more important Margin Trading ('badla'), complained a broker who participated in the meeting.

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