KARACHI: Karachi Stock Exchange (KSE) Board terming fiscal year 2014-15 (FY15) budget negative for the capital market said excessive taxation would impact unhelpfully on future performance of the capital market.
During a budget review meeting, KSE’s Board appreciated the Finance Minister Dar’s comment about the excellent performance of Karachi capital market in last 12 months and other necessary measures in the budget by the government to bolster economic growth.
However, it was noted the capital market, which was a documented and compliant sector has been burdened with further taxation. This might impact the future performance of capital market adversely besides negative for market liquidity.
The rate of Capital Gain Tax (CGT) on stock market transactions within a year has been raised from 8 percent to 12.5 percent and for transactions more than one year tax would be 10 percent as against no tax previously.
The holding period for tax-free capital gain has been increased to two years. It was unfair to those investors who were invested for more than one year. Those who think more CGT can be collected should appreciate tax collected so far was from individual investors (7% of the total). Banks, insurance companies, mutual funds, foreign investors and sponsors who make 93 percent were not included in the National Clearing Company of Pakistan.
Additionally 5 percent tax has been imposed on issue on bonus shares, which was not a practical measure. The bonus shares are merely an accounting entry and it is not an income, therefore the Lahore High Court had struck it down previously. Further, it may not be out of place to highlight in the Indian jurisdiction, this matter has been tested in appeals and it has been held that bonus shares were not dividend or for that matter income when issued to holders of ordinary and equity shares.
The Board once again reiterated the proposal of compulsory distribution of cash dividend out of current year profit if the company’s reserves are equivalent to its paid up capital. This was introduced by Ishaq Dar in 1999 and had a healthy impact on the investors’ confidence. However this feature did not continue, as the PML-N government did not remain in power. The small investors are short changed by the sponsors by declaring paltry dividend even when they earn handsomely. It is hoped to bolster investor’s confidence Dar will take remedial measures.
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