Thursday, January 21, 2021

Abolishing CGT will spur capital market growth

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Adil Ghaffar
Adil Ghaffar
Experienced Chief Executive Officer with a demonstrated history of working in the financial services' industry. Skilled in Negotiation, Business Planning, Microsoft Word, Accounting, and Team Building. Strong business development professional with an ACA focused in Accounting and Finance from institute of chartered accountants of Pakistan. Contact: [email protected]

Stock market is considered to be the most regulated and documented avenue where almost 95% of the monies received are through banking system. In the presence of existing Know your customer (KYC) and different rules and regulations, including but not limited to, Anti Money Laundering (AML), it would be unjustified if Government of Pakistan (GOP) does not take advantage of this fabulous avenue to raise funds.

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Furthermore, the state of the art electronic share transfer system, make it fully traceable.

Being regulated and fully documented, in fact, Government of Pakistan should use this avenue to broaden its tax net. We need to attract people towards documentation of economy and thereafter, FBR should play its vital role in bringing people to tax net.

Stock market is a place to raise funds. GOP should also be able to cash this avenue by allowing complete CGT exemption on trading of securities.

When CGT exemption is given to foreigners

This will encourage foreigners to invest in Pakistan and in lieu of CGT, Pakistan will be able to get following benefits:

  1. Increase in forex reserves;
  2. Interest free; and
  3. No effect of devaluation.

In other words, if Pakistan is borrowing from International sources than its borrowing rate would be around 5%. Furthermore, this loan will be subject to future devaluation. Our track record reveals 10% as yearly devaluation. Hence all international borrowings are @15%+.

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Whereas, if GOP exempts CGT, currently at 15%, GOP will be able to kill two birds with a single stone i.e. mobilize funds for Capital Market without incurring any cost.

When CGT exemption given to local investors

The exemption from CGT will provoke local investors to invest in Stock market which will eventually help GOP:

  1. In bringing the people towards documentation of economy;
  2. To broaden its tax base; and
  3. To eradicate, to a certain extent, the black economy;

GOP, in achieving the above objectives and with the same rationale has already adopted following measures in the Finance Supplementary (Second Amendment) Act, 2019 whereby:

  1. Withholding tax on cash withdrawals has been exempted; and
  2. Non-filers to purchase locally manufactured motor vehicles.

Both the above amendments are directed towards the prime objective of GOP i.e. Documentation of Economy.

On the same basis and as discussed above, Capital Gain Tax on stock market transactions should be completely abolished.

Please note that exemption of CGT on investments in stock market has nothing to do with tax on real estate or other assets class, such as, National Saving Schemes, Prize Bonds, etc.

When compared with fixed income saving schemes, be it National Saving Scheme or Prize Bonds, where withholding tax is being deducted, this class of asset investment, i.e. investments in stock market, generates business activity alongwith employment creation. Whereas, under fixed saving schemes, GOP is the only beneficiary and utilise these for its own use.

Furthermore, fixed income saving schemes are also bearer and therefore failed to attract documentation of economy. Hence this asset class is different from the saving schemes.

 

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Adil Ghaffar
Adil Ghaffar
Experienced Chief Executive Officer with a demonstrated history of working in the financial services' industry. Skilled in Negotiation, Business Planning, Microsoft Word, Accounting, and Team Building. Strong business development professional with an ACA focused in Accounting and Finance from institute of chartered accountants of Pakistan. Contact: [email protected]
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