SECP Annual Report-2012: CGT initiative cast positive impact on bourses

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The Securities and Exchange Commission of Pakistan (SECP) major initiative to revive Capital Gains Tax regime has resulted in positive impact on stock exchanges taking Karachi Stock Exchange (KSE) to new heights, showing consistent upward trend of KSE-100 Index in 2012.
According to the SECP Annual Report-2012, since the news about the SECP's initiative to revive the CGT regime in mid-January 2012, the stock market is showing an upward trend. The lowest KSE-100 index during the current calendar year was 10,909.12 on January 12, 2012, the day just before the announcement of the SECP initiative to revive CGT regime. The highest KSE-100 index was 15,449.61 on September 14, 2012, the day after issuance or amended CGT Rules by the FBR.

The SECP, cognisant of its responsibility to strike a balance, ie rationalise taxes to boost growth of the sectors under its purview while at the same time ensuring Mat these sectors make equitable contribution to the government exchequer for overall development of the country, and working in close conjunction auto FBR was able to implement a number of reforms in the taxation regime for capital markets, corporate and NBFE sectors, during the year, it said.

The report said that the major initiative undertaken by the SECP was to revamp the capital gains taxation (CGT) regime on securities trading in Pakistan. The CGT on securities trading remained exempt from taxation for 36 years till June 30, 2010 and during this period investors made undocumented gains. After implementation of tax on securities trading and new taxation rules, there were anomalies in the return filling, calculation mechanism, etc, resulting in exit of the investors from stock markets and the trading volumes plunged.

In a bid to give confidence to the market and bring back the investors, the SECP in collaboration with the FBR, NCCPL, CDC and other stakeholders revised the CGT Regime by making amendments in the Income Tax Ordinance 2001 and Income Tax Rules 2002. Revamped CGT regime addressed the following issues:

Document the income and economy with ease of transaction and Minimise interaction with tax authorities. Under this regime, the National Clearing Company (NCCPL) has been made the withholding agent to compute and collect CGT from all capital markets transactions relieving the individual investor from the hassle of CGT calculation. The system developed at NCCPL is fully automated that would remain under the vigilant audit of FBR on a regular basis to ascertain its effectiveness. The NCCPL shall issue prescribed Annual Certificate to the taxpayer which will be conclusive evidence for taxation purposes and will submit a quarterly statement relating to CGT deducted from all Capital Market investors to FBR.

Under the regime no question relating to source of investment for existing investments wilt he asked if statement of Investment, Wealth Statement and Income Tax Returns are filed with the FBR; and the amount remains invested for a period of 45 days till June 30, 2012. Further, no question relating to source of investment for future investments till June 30, 2014 will be asked if:

The amount is kept invested for a period of 120 days till June 30, 2014; Tax on capital cams is paid; and Statement of Investment, Wealth Statement and Income Tax Return is filed with FBR.

The requirement of filling the return of income along with wealth statement, and to keep the funds invested in stock markets for 120 days, will help document all capital market transactions and safeguard against any mis-use of investment opportunity by any investor. Further to ensure that CGT scheme is in compliance with the FATF Principles SEEP issued a notice to alt stock market brokers for strict compliance with the AML requirements irrespective of the implementation of CGT regime.

The Secretariat of Financial Anton Task Force (FATF) in its Review found Pakistan's CGT Regime not in branch of FATE Principles for such schemes and having no negative impact on implementation of AML preventive measures FATF Secretariat has assessed the CGT programme to comply with the FATF's four basic principle on Voluntary Tax compliance (VTC). Pakistan is one of the first few countries to successfully scoot the VTC regime. FATF Secretariat recommended no further action to be taken in relation to Pakistan's capital gain tax programme. Assessment review by FATF Secretariat removed the apprehensions, considering CGT Regime as being in violation of AML law.

The SECP in continuation of its strategy encompassing continued reforms in the capital markets and corporate sector, deepening of structural reforms through removal of anomalies constraining economic activity, and to provide a level playing field to all the stakeholders, recommended various amendments to the Income Tax Ordinance, 2001 and Federal Excise Act 2005, most at which were notified through the Finance Act 2012-13. Significant amendments are as follow:

Removal of Tax Arbitrage for the Income and Money Market Mutual Funds: The tax arbitrage available to the Commercial Banks to invest n the Income and Money Market Mutual Funds was resulting in money flow of the banks towards these funds instead of providing credit in the economy. The arbitrage was therefore, taken back.

Group Companies: To promote and consolidate the fragmented corporate structure by forming groups, an incentive is given by exempting the withholding of taxes on the dividends declared and profit on debt amounts given within a group. NCCPL Appointed as Withholding Agent on Margin Financing: NCCPL is appointed as withholding agent on margin financing which will increase the tax revenue in future. Tax Free Transferability of Amounts in Retirement Funds: Exemption from taxation is given to a person to transfer amounts from Provident to Voluntary Pension Scheme and vice versa. Further exemption is provided to persons to withdraw amounts, from amounts of provident fund, from the Voluntary Pension Scheme.

Exemption from Withholding Taxes for Exempt Incomes: The Mutual Funds and Pension Funds are now exemption from withholding taxes w.r.t the Capital Gain Tax. Extension in Exemption from Taxation: To promote the Venture Capital Companies and Funds, the existing exemption from total income till 2014 is now extended till 2024. Increasing the Depreciation Limit for Vehicle not plying for Hire: The limit of cost available for depreciation of vehicles not plying for tore is increased from Rsl.5 million to Rs 2.5 million, the report added.

Courtesy: Business Recorder

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