Fear that lurks behind capital gains tax

Some market participants are cursing the capital gains tax (CGT). But other major players say that the market had already factored CGT into stock prices.

They also insist that imposition of 10 per cent CGT on securities held for six months and 7.5 per cent on stocks that investors keep for six months to a year are not really scary. But for all that, it still is the fear of CGT that rocks the boat, not for the net profit of investor that could receive a dent, but because of the anxiety over the inability to escape the taxman’s eye.

As CGT rates were declared after consensus between the market representatives and the FBR, it could not have come as a shock. But the realisation that seems to be dawning now on many brokers and hundreds of investors is that they have finally fallen under the tax net. “It will no longer be possible to trade on ‘benami account’, says an analyst. That would eventually help in achieving the goal of “documentation of economy.” Since all investors in stocks would have to file tax returns whether they earn profit or suffer a loss, the tax officials would be able to detect profits earned on accounts operated under ghost names and even dead men’s ID cards.

The market has eluded CGT for as long as 36 years. “The new tax is in line with government policy of moving from presumptive tax to direct tax regime,” says Mohammad Sohail, chief executive at Topline Securities. The tax would be imposed on purchase of stocks made after July 1, 2010.

Investments retained over a year would be tax-free.

A capital loss would not be allowed and CGT would not be deducted at source. Each investor would be required to file a tax return.

“According to local (tax) rules, capital losses can be adjusted with capital gains and unabsorbed capital losses can be carried forward for six years.

Hopefully this would apply on tax on gain from sale of shares also,” says Sohail. All of which brings forth the core point: Brokers and investors trading on ‘benami accounts’ could be easily traced and there would be no dead man visiting the stock market to dabble in shares.

The mandatory requirement of filing a tax return would not require a Sherlock Holmes to detect whether a genuine investor has earned a profit and more importantly whether all investors trading are for real and alive. On the other hand, “Investor concern of possible ‘harassment’ by tax officials is genuine and will have to be addressed,” says a stock broker.