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Tuesday March 19, 2024

Over-enthusiastic stock market disappointed

By Javed Mirza
May 27, 2017

Fixed CGT, hike in dividend tax rejected

KARACHI: Stock traders on Friday rejected the introduction of fixed capital gains tax (CGT) regime and increase in income tax on cash dividends, saying their proposals were ignored in the budget. 

“It was quite shocking that none of our recommendations were incorporated in the federal budget,” said Abid Ali Habib, director on the Pakistan Stock Exchange’s board.

“The market is performing well and foreign interest is imminent after the MSCI (Morgan Stanley Capital International) upgrade and given the improving economic indicators we were confident the government would provide some incentives.” 

The government announced a fixed CGT on shares trading in the budget for 2017/18. Under the regime, 15 percent CGT was proposed regardless of holding period for filers and 20 percent for non-filers.

Earlier, CGT was applicable at the rate of 15 percent for filers and 18 percent for non-filers, on securities held for less than 12 months, while CGT was 12.5 percent for filers and 16 percent for non-filers on securities held for a period between 12 months and 24 months.

Moreover, income tax on cash dividends has been raised to 15 percent from the existing 12.5 percent. Stock investors, be they retail or institutional as well as companies, rely on trading.   The government also decided to continue tax credit equal to 20 percent for the tax year and subsequent year in which a company opts for listing on the bourse, while tax credit equal to 10 percent would be available for another three years in order to encourage new listings.

Shahid Habib, chief executive officer at Arif Habib Limited termed the extension in tax credit for new listings as good. 

“This would definitely encourage new listings,” Habib said. “However, those opting for bourse listing through the ‘offer for sale’ would be discouraged as this would cost them 15 percent capital gains tax.”

He said overall the budget announcement is negative for the bourse and would hurt market sentiments.

The Finance Bill 2017 also proposed a 10 percent tax on every public company, except scheduled bank or modaraba, which drives profit for a tax year but does not distribute at least 40 percent of its after-tax profits within six months of the end of the tax year through cash or bonus shares.

The bill also proposed a reduction in corporate tax rate to 30 percent from the current 31 percent.

Khurram Schehzad, chief commercial officer at JS Global said the federal budget 2017 is not positive for the corporate sector at all. “However, we can term it neutral.”

Schehzad said cut in corporate tax rate is a good step. He was also critical of increased rate of tax on cash dividends and a single slab for capital gains tax.

“Pakistan is going to MSCI EM (Emerging Markets) and the government should have introduced measures to encourage foreign investment,” he said. Tax rates must not have been increased if not reduced.

An adjustment of withholding tax on brokers is no longer available in the upcoming fiscal year. “Currently the rate of advance withholding tax collected from stock exchange brokers is 0.02 percent and is adjustable. This withholding tax is now being made final tax,” the budget document said.