KARACHI: The investors were taken aback by back-to-back blows delivered by Finance Minister Ishaq Dar on the country’s corporate sector and the stock market in his budget speech for 2015-16 on Friday. Their worst fear of increase in Capital Gains Tax (CGT) materialised with the imposition of higher slabs.
On securities held for less than one year, the CGT was raised to 15 per cent from 12.5pc; for holdings between one and two years, the gains tax was jacked up to 12.5pc, from 10pc.
“Long term investors were also pulled into the net by the levy of 7.5pc CGT for holdings between 2 to 4 years,” grumbled a market participant.
Secondly, the budget enhanced rate of taxation on dividend income to 12.5pc from earlier 10pc, while non-filers would be taxed at 17pc, up from 15pc.
Third, in accordance with the earlier announced schedule of bringing down corporate tax rate from 35pc to 30pc in five years, the finance minister affirmed that there would be just 1pc cut in corporate tax to 32pc from 33pc for the financial year 2015-16.
Former chairman Karachi Stock Exchange, Arif Habib says that investors’ confidence could initially be shaken but ‘after a while as the impact sinks into the psyche, the market might stabilise’.
He believed that the lack of more profitable investment avenues could attract investors to stocks.
Small investors may be encouraged by the re-introduction of compulsory dividend payment by profitable companies which otherwise would be charged withholding tax at 10pc in case the reserves of the company are built up at 100pc of their paid-up capital.
Raza Jafri, director at Intermarket Securities feels that the budget was more of a ‘mixed bag’ for the capital market. He did not see investors greatly spooked by the increase in CGT.
“The new slab of 7.5pc CGT on holdings between two to four years will scarcely hurt individual investors as most do not hold equities for that long a period,” he said. He believed that institutions may be sour over the extension in period for levy of CGT.
Jafri and most other analysts were of the view that the budget was positive for the cement sector due to the higher allocation of Rs700 billion for PSDP and host of other incentives and slightly negative for banks as measures were proposed to regularise their investment in government securities.