In a bid to increase the revenues of the national kitty, the government has proposed to increase the rate of capital gains tax (CGT) rate on the trade of securities that are sold within two years. Additionally, it was proposed, that gains from the sale of shares after two years should also be taxed by imposing 7.5% CGT.
In budget 2015-16, which will be unveiled on June 5, CGT rates may be increased by up to one-fourth of their current level, said sources in Ministry of Finance and Revenue.
According to the proposal that the government may submit to the Parliament as part of next year’s budget, the tax rate on shares sold within a year may be increased from 12.5% to 15% – reflecting an increase of 20%.
Last year, the government had reduced the CGT rate on short-selling from 17% to 12.5% but increased the period of short selling from six months to one year.
The rate of CGT on shares sold after one year but within two years could be increased from 10% to 12.5% (reflecting an increase of 25%). In the last fiscal year, the government had increased the CGT rates for this slab from 9.5% to 10%.
A new levy
At present, income from shares sold after holding them for two years is exempted from CGT. The sources said the government is planning to introduce a new slab to capture gains that currently remain exempted from the levy.
The sources added that the government might introduce a new slab in the first schedule of the Income Tax Ordinance where it could charge 7.5% CGT on shares sold after two years but within five years of the holding period.
The proposal has been finalised at the level of the Federal Board of Revenue (FBR) and is part of the budgetary measures that will be tabled in front of Prime Minister Nawaz Sharif for his endorsement before they are presented to the federal cabinet.
According to FBR officials, CGT collection from the stock market in the first 10 months of the current fiscal year stood at Rs4.5 billion. Taxes collected from the stock market do not match the strong performance of the Karachi bourse, said experts.
Karachi Stock Exchange’s (KSE) market capitalisation rose to Rs7.1 trillion by May 26 this year, indicating buoyancy in the stock market.
Investors are opposed to changes in the CGT rates but expect that the government may offset the impact of increase in rates with some other incentives. The sources said the investors are also lobbying to convince the government to withdraw 5% tax on bonus shares.
However, Finance Minister Ishaq Dar is not in favour of withdrawing the bonus share tax, which the government introduced in the last budget. The levy had been challenged in the Supreme Court, but the government finally managed to get the stay order vacated. It had originally estimated receiving Rs15 billion from the bonus share.
Sources said the Ministry of Finance was of the view that the bonus share tax was an important tool to either compel companies to issue bonus shares or give dividends to shareholders. Income from dividends is taxed at the rate of 10%.
The FBR was expecting Rs30 billion earnings from dividends, which it said would be roughly Rs5 billion higher than the last fiscal year collection.
Market analysts were expecting that the government would introduce certain measures that will increase activities in the market, particularly levying additional taxes on free reserves of a company’s paid up capital.