CGT on stock exchanges: new rules to clarify certain

concepts
SOHAIL SARFRAZ

ISLAMABAD (September 01 2010): The new

income tax rules for capital gains tax (CGT) on stock exchanges would
clarify that trading period of less than one day would be considered for
calculation of the 'holding period' to impose the CGT on stock
exchanges. The FBR would particularly clarify the concepts of "wash
trade" and the "cross trading" under the new rules on 'computation of
capital gain'.

The transactions taking place under the cover "wash trade" and the
"cross trading" would be checked through the draft CGT rules. This
would ensure that the data of actual transactions would be available to
the tax department and it would help in checking the phenomenon of
"wash trade" as well as "cross trading".

Sources told Business Recorder here on Tuesday that the FBR is

drafting new rules on the CGT in consultation with Karachi Stock
Exchange (KSE). The FBR has decided to clarify a number of issues of
stock exchanges through the new rules to be issued before October 7
ie date for filing of quarterly statements by the investors in stock
exchanges.

Under the draft rules, securities held for a period 182 days and for a
period of 365 days may be taken as held for six months and one year
respectively. The securities held for less than one day may be treated
as held for less than six months. Sources said that trading of shares at
the stock exchanges for less than one day period would not be
exempted from the CGT. The trading taking place in less than one day
period would be considered for the calculation of the CGT. The issue of
trading in less than one day at stock exchanges would be dully clarified
through the new CGT rules.

The CGT is a transaction based-tax and exemption would be available

as specified in the law. Where holding period of a
stocks/shares/security is less than six months tax is to be charged 10
percent. Where withholding period of the stocks/shares/security
exceeds six months but it is not more than a period of twelve months,
tax is to be charged at the rate of 7.5 percent. No tax is chargeable on
capital gains arising from securities held for a period of over 12
months.

The FBR rules would ensure that the CGT should be properly paid by
the broker community for which legal issues would be clarified under
the new CGT rules. One of the important issues is exemption from
filing of quarterly statements by individual investors covering
small/retail investors.

The FBR would put in place some mechanism to ensure that big
companies or Association of Persons would not declare themselves as
small individuals for obtaining exemption from quarterly filing of
returns. Under the proposed CGT rules, the FBR may give responsibility
to the brokers to ensure that investors liable to file quarterly statement
should submit the same. The FBR would specify some kind of
responsibilities of the brokers in this regard under the new CGT rules.

Following exemption to retail investors from filing of quarterly return

for advance tax, they may be allowed to file annual statements to
facilitate these individual investors. Under the proposed CGT rules, the
FBR will issue comprehensive procedure for computation of capital
gain tax CGT on shares trading at the stock exchanges to clarify issues
related to acquisition and disposal dates of shares.

The FBR draft rules have clarified issues pertaining to date of securities
acquisition, their disposal, holding period, derivative products and
miscellaneous issues with respect to buying and selling of shares at
the stock exchanges. The FBR will propose amendments in the Income
Tax Rules, 2002 through an SRO for issuance of the draft rules on
'computation of capital gain' for the information of all persons likely to
be affected. The rules would also explain the method to determine
date of acquisition of different/various securities, disposed of, for the
purpose of determination of holding period.

The FBR will further clarify that only express and specific exemptions in
respect of income from 'capital gains' as provided under the second
schedule to the Income Tax Ordinance, 2001, shall apply for the
purposes of taxation of income from 'capital gains' arising from
disposal of securities. The loss suffered on disposal of securities during
the period of a tax year shall be set off against capital gains from
disposal of securities during such tax year, irrespective of the period of
holding of such securities in such tax year, sources added.