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WEEKLY
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Friday, March 28, 2008
KARACHI: In its budget proposal for the fiscal year 2008-09, the Karachi Stock Exchange (KSE) has recommended to the Minister of Finance to extend exemption in Capital Gain Tax (CGT) in shares market up to June 30, 2013.
This exemption is ending on June 30, 2008, as per decision taken by the previous government last year. “Keeping in view the prevailing conditions in the country it is recommended that the exemption from tax may be extended for at least five years up-to June 30, 2013, for providing continued stability to the stock exchanges,” stated KSE proposal.
Recent imposition of capital gains tax on banks for trading activity has led to significant decrease in stock market volumes (impacting price discovery, impact cost and overall efficiency of the market); this experience should be taken into account when considering this issue, KSE pointed out.
In order to avoid any uncertainty, which may trigger selling, thus affecting the market adversely, KSE requests that this exemption of capital gains tax be further extended in order to promote equity investments in the country for its rapid industrialization.
Such an announcement, if made at the earliest, will send a positive signal to the foreign investors who plan their investment strategies on long-term basis, KSE proposed. This will prove very helpful mainly in sustaining current level of market but achieve even higher levels of new investments leading to accelerated industrial activity in the country, the proposals added.
A survey of regional markets, particularly Middle East Markets (with whom KSE competes for capital flows) indicate that capital gains tax is exempted in most markets and where applicable was imposed at low rates (five per cent).
In support of KSE proposal, the Exchange argued that prior to imposition of Capital Value Tax (CVT) on July 1, 2004, the average daily volumes in the ready market were 389 million shares that dropped to 324 million shares after imposition of CVT. In June 2006, the rate of CVT was doubled leading to a sharp fall in daily volumes, which now average 230 million shares in the ready market, it added.
If government imposes Capital Gain Tax in shares market from the scheduled date i.e. July 01, 2008, the decision might further lower the average daily turnover.
In January 2007 the government had announced an extension the Capital Gains exemption for Capital Markets till June 2008. This was accompanied by an assurance that the matter would be reviewed and further extension (if decided on) would be announced well ahead of the June 2008 date so that capital market participants can make informed investment decisions.
Pakistan has witnessed significant foreign portfolio investment over the past five years (increasing from a modest $280 million in 2004 to $1.82 billion in 2007. Many funds and long term foreign portfolio investors continually evaluate their global asset allocation decisions consequently, it would be a critical input in their decision making to know that their investment in Pakistan will not be subject to capital gains post June 2008.
Similarly, domestic investors (institutional and retail) are influenced by the uncertainty of political change and transition; their investment decisions will be further impacted by the uncertainty on this capital gains issue, thus depriving the capital market of an important source of liquidity and support in the months ahead.
In order to attract more and more companies for listing, it is proposed that the tax rates for the public limited listed companies be also reduced in the same ratio as that of private companies so that not only the corporate tax rates for the listed companies is brought down to the level of 25 per cent as against the non-listed private companies at 35 per cent but differential tax treatment of 10 per cent between the listed and non-listed companies is also maintained.
This will help in promoting and encouraging better corporate disclosures by the listed companies and corresponding better returns to the equity investors. This process will not only off-set the revenues losses for the exchequer, if any, but would lead to disclosure of better profitability and growth of corporate taxes.Alternatively, all IPOs should be exempt from any capital market related taxes for a period of 5 years from listing date, KSE proposed.
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ISSN 1563-9479 
