The National Clearing Company of Pakistan Limited (NCCPL) has notified reduction in the capital gain tax (CGT) to 12.5% on sale of shares on profit by investors at the Pakistan Stock Exchange (PSX) for the ongoing fiscal year that started on July 1, 2021.

“The investors, whose names appear in the Federal Board of Revenue’s (FBR) active taxpayers’ list (ATL), are also entitled to adjust losses booked on sale of stocks (the sales price stood low compared to purchasing one) in the prior two years (FY20 and FY21),” NCCPL Chief Executive Officer Muhammad Lukman said while talking to The Express Tribune.

“NCCPL has collected and submitted over Rs10 billion to FBR under CGT in the preceding fiscal year 2020-21,” he said.

“The collection was significantly higher compared to the prior fiscal year 2019-20,” he said, adding that he would share the actual collection amount for FY21 and FY20 on a working day.

NCCPL is responsible for computing, determining and collecting CGT from investors at the PSX, mutual fund management companies and Pakistan Mercantile Exchange (PMEX) and depositing them with the FBR on a monthly basis since April 2012.

The government slashed CGT rate by 2.5 percentage points to 12.5% for FY22 through amendments in CGT system via Finance Act, 2021. The tax rate stood at 15% since start of FY17.

The reduction in the rate is aimed at incentivising existing investors to scale up investment in shares of companies and debt securities listed at the stock market and to welcome new investors to the bourse.

The investors would pay zero CGT on sale of shares “acquired before July 1, 2013,” the NCCPL notice read.

In FY21, the PSX’s benchmark KSE-100 Index exhibited a seven-year high performance as it rose 38% (or 12,934 points) to 47,356 points in the wake of government’s business friendly policies, low interest rate and economic turnaround.

The market is expected to maintain the growth momentum and the benchmark index is anticipated to hit a record high of 55,000 points by end of December 2021 following reduction in CGT, an expert said after the government proposed the cut in CGT rate on June 11, 2021.

The KSE-100 Index closed at 47,170 points on Friday. It hit a recent high of close to 49,000 points in mid of June.

CGT for non-filers at 25%

The Pakistan Tehreek-e-Insaf (PTI) government has, however, maintained the rule introduced by the previous Pakistan Muslim League-Nawaz (PML-N) government of charging 100% higher CGT from non-filers of tax returns.

Therefore, investors – whose names do not appear on ATL – would be subjected to CGT at 25% during FY22. Moreover, they would be barred from adjusting losses, if any, booked on sale of shares in the previous years.

The rate for non ATL investors, however, has been reduced by five percentage points to 25% for FY22 compared to 30% during FY17 to FY20.

“The FBR has continued the practice of charging double CGT from investors not appearing in ATL to encourage them to file tax returns with FBR (to document the economy),” Lukman said.

Others to pay at 5-50%

For unit holders of mutual funds, the rate of CGT would remain zero if investors sell units after holding them for more than four years.

But in case, individuals, association of persons and corporates opt to sell units of “stock funds” in less than four years from the date of purchase, they would pay CGT at 10% (non-filers of tax returns at 20%), “if dividend receipts of the fund are more than capital gains”, according to NCCPL’s notice.

They would be subjected to pay CGT at 12.5% (non-filers at 25%), “if dividend receipts of the fund are less than capital gains”, it said.

The rate of CGT for individual investors in mutual funds other than stock funds would remain at 10% (non-filers at 20%). But in case corporates would invest in other mutual funds instead of stock fund, then they will be subjected to pay 25% (non-filers at 50%).

Assets under management of Pakistan’s mutual funds industry crossed Rs1 trillion for the first time in June 2021. They grew 37% to Rs1.02 trillion in FY21 compared to Rs742 billion in FY20, according to AHL Research.

Investors taking positions in future commodity contracts at Pakistan Mercantile Exchange (PMEX) would pay CGT at 5% (non-tax filers at 10%) in FY22, NCCPL said.

“The rate of CGT remains comparatively low for investors taking positions in derivatives at PMEX as it remains relatively a new market (in Pakistan),” Lukman said.

Published in The Express Tribune, August 15th, 2021.

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