Demand to abolish capital gains tax

November 19, 2007

By Sultan Ahmad
www.dawn.com

There has been a persistent demand from the directors of the Karachi Stock Exchange (KSE) and the far larger number of vociferous brokers that the capital gains tax (CGT) should be abolished for ever.Those who trade in shares do not have to pay any CGT on their large profits until June 30,. 2008 and the KSE directors now want that the deadline be extended and not postponed by one or two years as was done in the past.The directors and brokers met the former prime minister Shaukat Aziz at the Sindh Governor House last week and made this demand. He was sympathetic to their demand and appreciated their role in the country’s economy. He also wanted stock exchanges to play a far larger role in promoting the corporate sector.Mr Shaukat Aziz is friendly with many major brokers and listened to their demand with considerable sympathy. The KSE directors also wanted lower taxes- a minimum of five per cent-- in the income of companies listed with stock exchanges so that more private limited companies will be tempted to get listed with exchanges.The KSE also wants the cap on the continuous funding system (CFS) to go. The earlier the CFS ceiling was kept at Rs33 billion but later raised to Rs55 billion, while the total actually exceeded that. Now, the stock exchanges want the cap on CFS to be removed so that they can borrow as much from banks as they want.. The Securities and Exchange Commission of Pakistan is finalising a new CFS funding system- CFS MKII-- which should be out soon.Not satisfied with the bank funds available under the CFS, the KSE directors also want the 20 per cent limit set on the banks resources for buying shares so that brokers are enabled to get as much credit as needed. The Governor of the State Bank of Pakistan, Dr Shamshad Akhtar is not in favour of this demand as she wants the stock exchanges to mobilise money from the public which is readily available instead of using bank funds for the purpose.The purpose of the stock exchange is to attract new investment and not merely to re-plough the old investment Mr.Shaukat Aziz advised the KSE officials to send their demands to the government in writing.Meanwhile, because of the political crisis, the KSE index which was heading towards 15,000 collapsed on the black Monday following the declaration of emergency and political rumours and lost 635.08 points –the heaviest one day fall. After that $88.7 million were withdrawn from the foreign portfolio investment in three days and the KSE index shed 305.83 points on Wednesday last. And the rupee has come to its lowest parity with the dollar in three years.The Karachi Stock Exchange or for that matter other exchanges are not attracting new investment but merely re-rolling old investment in the form of spirited speculation and the brokers have made large gains.The number of companies listed on the KSE, in fact, has shrunk because of mergers and withdrawals from the exchange. Their owners say there is no incentive to be listed on the exchange as the tax relief disappeared years ago and as far as good companies are concerned they can get all the capital they need from banks.The foreign portfolio investment is going back because of the political convulsions and rising violence. The travel advisories of many governments against visiting Pakistan is not helpful to the investment climate. In such a context, those who make large fortunes on stock exchanges or through real estate deals don’t pay income tax or capital gains tax. Why should others who make a modest living pay the tax?The stock exchange directors told Mr Shaukat Aziz there is no capital gains tax in Sri Lanka, Singapore, Malaysia and Hong Kong but in India there is a two-tier tax system for those who hold the shares for a short time and those who sell the shares after a long time. And also the tax collection in Singapore, Malaysia and Hong Kong is rather strict compared to Pakistan. The tax structure in those countries is quite different from that of Pakistan.Many of these South East Asian countries have a sales tax of three to six per cent while Pakistan had a sales tax of a stiff 15 per cent and in fact it is the single largest source of revenue. So if those who make large windfall gains do not pay tax, why should any one else? , others will ask At 10 per cent of the GDP, the domestic tax collection is one of the lowest in the region, so further tax exemption should not be given to those who make large windfall.What the stock exchange in fact wants is that its members should be given all the bank funds they like to buy shares and when they sell them at a large profit they should not be taxed. Instead they should be given tax relief. Such demands will be totally unacceptable to the people who pay tax on a meagre income and suffer the privations of a soaring inflation.The stock exchanges have to help attract new capital for new industries and expand the industry instead of ploughing and re-ploughing the investment in shares to make large gains through outright gambling.