Aziz to finalise CVT proposals today

* Stock exchanges present three taxes to committee, agree to contribute Rs 1.5b
* Taxes to be deducted at Clearing House

By Naween A Mangi

KARACHI: Finance Minister Shaukat Aziz is expected to meet Arif Habib, chairman of the Karachi Stock Exchange (KSE) in Islamabad today (Thursday) to finalize alternative proposals to the capital value tax imposed on the purchase of shares in the budget.

The committee set up by the federal government earlier this week to develop the proposals met in Islamabad on Wednesday evening where the chairmen of the three stock exchanges presented their three alternatives to the member tax policy, Central Board of Revenue.

The exchanges agreed to generate a total of Rs 1.45 billion per year through the levy of the three taxes.

“We presented the proposals and they listened to us and the finance minister has asked us to stay behind and meet with him tomorrow to finalize,” a source privy to the meeting told Daily Times.

The three proposals presented to the CBR were: increasing the withholding tax on brokerage commissions from 5 percent to 10 percent, imposing a 10 percent withholding tax on intra-day profit and a 10 percent of tax on profit from carry-over transactions financing, the source said.

He said the proposals also included a plan to deduct taxes at the Clearing House to ensure collection. “This will ensure 100 percent collection,” the source said.

Sources close to the committee told Daily Times that the following assumptions and calculations had been presented showing the breakup of tax collection:

Average daily turnover at the KSE was assumed at 400 million shares and the combined average daily turnover at the Lahore and Islamabad Stock Exchanges was assumed at 100 million shares. Taking a total average daily turnover of 500 million shares, this was multiplied by an average share price assumed at Rs 50. The result, Rs 25 billion was then multiplied by a total number of trading days per year at 240, and then further by 0.02 to yield a total tax collection of Rs 1.2 billion. The figure of 0.02 represents 2 paisas per share, representing 10% withholding tax on brokerage commissions and 10 percent withholding tax on intra-day trading profits. Thus, brokers would contribute 1 paisa per share in taxes and investors would contribute 1 paisa per share in taxes. This breakdown represented the first two proposals.

The third, a 10 percent withholding tax on COT profit was calculated as follows: Taking an average COT per year at Rs 25 billion, the profit on this was calculated at 10 percent, i.e. Rs 2.5 billion. Withholding tax at 10 percent would mean contribution from this tax would amount to Rs 250 million per year.

The total would thus work out to Rs 1.45 billion which would also represent the full and final tax liability.

One broker said this proposal amounted essentially to a 0.02 percent capital value tax since it also taxes turnover. “If this tax is wrong in principle then what’s the point of this,” he said. “The only difference here is that the tax is being shared between the brokers and investors and that too will ultimately be borne by investors since brokers will pass it on.” The broker community had agreed in a general body meeting on Tuesday to pay a total of Rs 1.5 billion in taxes through levies other than a CVT.

Widespread protests broke out among the share trader community after the announcement of the new tax last weekend. The government agreed, after a marathon meeting with stock exchange representatives late Sunday night to review the decision. And the CBR chairman announced on Monday the setting up of a committee to develop alternative proposals to the tax.

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