Tax increased on trade of shares

ISLAMABAD: The government has increased the Capital Gain Tax (CGT) on trade of securities; though it will increase the government revenue, yet inflict a considerable loss on the economy.
For the financial year 2015-16, the CGT has been increased from 12.5 percent to 15 percent for securities held up to one year. For securities held for a period between 1 and 2 years, the CGT has been increased from 10 percent to 12.5 percent.
In addition, securities held for a period of more than 2 years and less than 4 years will be taxed at 7.5 percent.A senior economist, while commenting on the decision, said that the increase in CGT makes capital investments more expensive and therefore less investment occurs. Capital gains taxes reduce the return that entrepreneurs and investors receive from the sale of a business. This diminishes the reward for entrepreneurial risk-taking and reduces the number of entrepreneurs and the investors that support them. The result is lower levels of economic growth and job creation, a senior economist said while commenting on the decision.
The government also increased tax of dividends income from existing 10 percent to 12.5 percent. Consequently, in case of non-filers the rate of tax is proposed to be increased from 15 percent to 17.5 percent of which 5 percent shall continue to be adjustable. For Mutual Funds the existing rate of 10 percent shall continue, Finance Minister Muhammad Ishaq Dar said while announcing the Federal Budget 2015/16.
In order to protect interest of shareholders and to encourage companies to distribute dividend, the government announced that in the case of a public company other than a scheduled bank or a modaraba, which does not distribute cash dividends within six months of the end of the tax year or distributes dividends to such an extent that its reserves, after such distribution, are in excess of 100 percent of its paid up capital, the excess amount may be taxed at the rate of 10 percent.
Capital gains derived from trading of commodity future contracts on Pakistan Mercantile Exchange (PMEX) is not exempt from tax. However, the traders are neither filing their returns nor any withholding tax is applicable on these transactions. The government levied advance adjustable income tax at the rate of 0.1 percent on each transaction may be introduced to be collected on every purchase and sale of futures contract
Economic Experts say that a capital gain (or loss) imposes costs on the economy because they reduce returns on investment and thereby distort decision making by individuals and businesses.
A capital gain occurs if the value of the asset at the time of sale is greater than the initial purchase price. If high taxes make investors unwilling to sell taxable assets, the lock-in effect can reduce economic growth by preventing the reallocation of capital in low-performing investments to more profitable ventures. Economic growth slows as new businesses find it difficult to acquire start-up or expansion capital.
The tax is imposed when an investor opts to withdraw his or her investment from the market and realize the capital gain.This can have a substantial impact on the reallocation of capital, the available stock of capital, and the level of entrepreneurship.Ends