Morning Briefing for Feb 09, 2012 – Standard Capital

Karachi: Revision of CGT regime for stock market: Cannot legalize black money through revision: SECP

Revision in capital gains tax (CGT) regime for the country’s stock market cannot be used for whitening illegal money as only the legal money made during CGT exemption period of the last 36 years would be facilitated to be brought into the stock market till 2014.

According to Standard Capital, Securities and Exchange Commission of Pakistan (SECP) Chairman stated this on Wednesday. During finalizing the revision in CGT regime major concerns have been addressed. Although investors would be exempted from explaining source of investment under Section 111 of the Income Tax Ordinance, 2001, the provisions of the laws of the National Accountability Bureau, Anti‐Narcotics Force, Federal Investigation Agency and other national institutions would continue to apply regarding the source of investment. He said that in other available instruments for whitening of illegal money investors could pay 2 % only for whitening of their money and while investing in stock market prices of stocks could come down to 5% to 10 % and there would be a greater risk for them that would result in their staying away from investing in the stock market. If, a person comes and makes investment in the market and the next day he sells his stocks and walks out of the market, the holding period of stocks would stop such kind of investors from coming to the stock market, he explained. The SECP chairman explained the revised CGT regime and informed that all transactions recorded by the National Clearing Agency (NCA) would help stop tax evasion and tax avoidance. CGT would be applicable on profit only as against the earlier practice of profit and loss both. There is proposal to freeze the CGT rate of 10 % on the holding period of up to six months and 8 % CGT on period less than a year till 2014 to help investors bring in their investment from other sectors back to the stock market. He said that before imposition of CGT, tax collection from stock market was Rs 5 bn that has came down to Rs 400 mn. Revision in CGT regime would help bring in huge investment back to the stock market and this would help document the wealth, broaden the tax base and increase the tax proceeds. There is no need to get approval of the parliament for revision in CGT regime and the FBR has the authority to revise it, however, there might be a need to promulgate Presidential Ordinance for declaring NCA as a withholding agent. The major target that would be achieved through this revision in CGT regime is to revive the stock market, and help businesses to arrange capital required for their growth. At some time average turnover of the stock market was recorded at $300 mn that has declined to just $30 mn these days and there is an effort to get it back to its earlier turnover level. Some 500 mn shares were traded at the stock market at the time when the market was performing well and now these volumes have declined to 150 mn shares, SECP wants to bring the volume back to 500 mn shares or even higher and this would result in higher tax collection from the stock market. he added. He also said that placing any kind of cap on such kind of investment in stock market would be against the spirit of the stock market. Explaining the reason for introducing revised CGT regime from April 1, 2012, he informed that SECP, FBR and NCA have to revise their rules and regulations and these could be revised and implemented during a transition period of last three months of the ongoing fiscal year 2011‐12.

Limiting budget deficit at 5.7% of GDP:
IMF suggests making another attempt to introduce RGST Also suggests to reintroduce SED, IT surcharge, raise GST rate, reduce subsidies on wheat, fertilizer The International Monetary Fund (IMF) has proposed the government to make another attempt to introduce reformed general sales tax (RGST) and reduce subsidies on wheat and fertilizer to limit budget deficit at 5.7 % of the gross domestic product (GDP). IMF’s proposal also suggested reintroducing special excise duty and income tax surcharge; and raises the general sales tax rate. The IMF has released a complete report on 2011 Article IV Consultation and Proposal for Post‐Programme Monitoring for Pakistan, which contains the fund’s prescription to limit the budget deficit. The staff proposed a set of measures to build buffers and boost confidence, and cap the 2011‐12 deficit at 5.7 %of the GDP. At the same time, efforts should be made to minimize the electricity subsidies and keep provincial budgets in surplus.