FBR perplexed over capital gains tax on govt securities

KARACHI: Tax authorities have been finding ways to continue collecting capital gains tax on disposal of government securities since a recent legal change that remains silent on this after withdrawing withholding tax on such transactions, sources said on Friday.

The sources said the government withdrew withholding tax on earnings from investment in market treasury bills and Pakistan Investment Bonds through Tax Laws (Second Amendment) Ordinance, 2019. The law was promulgated on December 28, 2019 through the presidential order.

Sources said the law is, however, silent about how banks would collect capital gains tax on earnings from the foreign investment in the government securities as the banks, which used to collect both the taxes, are no more withholding agent.

The sources said the banks were liable to withhold the capital gains tax at 10 percent, which was final tax liability of foreign investors, prior to the promulgation of the tax amendment ordinance.

“After the recent amendments into Income Tax Ordinance, 2001 banks are no more required to withhold tax on transactions made by foreign investors of debt securities,” an official at Large Taxpayers Unit (LTU) said.

Tax experts at AF Ferguson Chartered Accountants said banking companies or financial institutions maintaining special convertible rupee account (SCRA) of non-resident are required, after the amendments, to deduct tax from capital gains arising on disposal of debt instruments and government securities – including bills and Pakistan Investment Bonds at 10 percent. Such tax deduction would constitute final tax on such capital gains, they said.

They added that the withholding of tax is still required to be made at the time when proceeds from disposal are accounted for in the SCRA and also that no adjustment for any capital loss might be made by a banking company or financial institution.

The government announced a comprehensive tax package through the tax amendment ordinance to attract investment in government securities.

Foreigners invested around $3.3 billion in government securities during the period of July 1 - February 13 of 2019/20, according to the State Bank of Pakistan. Such huge foreign investment in government securities has not been seen in the past.

The amendment into tax laws also excluded foreign investors of debt securities from filing of income tax returns. “With this exclusion the tax authorities may not be able to ask such foreign investors to declare their earnings in Pakistan and pay capital gain tax,” the official at the LTU Karachi said.