ISLAMABAD (July 17 2010): The Federal Board of Revenue on Friday issued an explanatory circular for the capital gains tax (CGT) on stock exchanges, clarifying that the holding period of securities will be calculated from the date of acquisition (whether before or after June 30, 2010) to the date of disposal of such security falling after June 30, 2010.
The FBR has also announced that the capital gains on disposal of securities will be taxed as a separate block of income and shall be charged on capital gain arising to securities holders irrespective of taxpayer's tax (exemption) status. According to the explanatory circular on CGT issued by the FBR here on Friday, the government has also imposed capital gains tax (CGT) on disposal of securities by insurance companies.
The FBR has further clarified that the exemption from CGT available to a collective investment scheme registered with SECP/mutual fund has been restricted only to the investment by such schemes/funds, which are debt or money market funds. Explaining the tax on capital gains on disposal of securities, the FBR said that on expiry of exemption on tax on capital gains, capital gains arising on disposal of securities have been made chargeable to capital gains tax through newly introduced section 37A of the Income Tax Ordinance 2001.
For the purposes of capital gain tax (CGT), "securities" mean share of a public company, voucher of Pakistan Telecommunication Corporation, Modaraba Certificate, an instrument of redeemable capital and derivative products. The Capital gain tax shall be chargeable on capital gain arising from securities disposed off on or after July 1, 2010. However, the capital gain tax shall not be chargeable on disposal of securities, which are held for a period of more than one year.
The adjustment of losses on disposal of securities in a tax year shall be adjustable only against the gain from disposal of any other securities and such loss shall not be carried forward to a subsequent tax year. About the applicability of the CGT on banking company and on insurance company, the FBR said that the provision of section 37AA are not applicable to an insurance company and a banking company as CGT in these cases is governed under the provisions of Fourth Schedule and the Seventh Schedule to the Income Tax Ordinance 2001, respectively.
The explanatory circular said that a new proviso has been inserted under clause (103) Part-I of the Second Schedule to the Income Tax Ordinance, 2001whereby exemption from CGT available to a collective investment scheme registered with SECP/mutual fund has been restricted only to the investment by such schemes/funds which are debt or money market funds. Thus CGT is now chargeable on the unit holders of such schemes/funds at the time of redemption of a security by the unit holder and a collective investment scheme/mutual fund shall be responsible to deduct tax (at the prescribed CGT rates as given below) on redemption of securities. Such tax shall be adjustable against the overall CGT liability, and tax so deducted shall be payable to the relevant Commissioner Inland Revenue within seven days of its deduction.
The rate of capital gain tax under section 37A as specified in Division VII of Part I of the First Schedule to the Income Tax Ordinance, 2001 are as follows: Where holding period of a security is less than six months, rate of tax would be 10 percent for Tax Year 2011. Where holding period of a security is less than six months, rate of tax would be 10 percent for Tax Year 2012; 12.5 percent tax for tax year 2013; 15 percent for tax year 2014 and where holding period of a security is less than six months, rate of tax would be 17.5 percent for tax year 2015.
Where holding period of a security is more than six months but less than 12 months, the rate of tax would be 7.5 percent for the Tax Year 2011; 8 percent for the Tax Year 2012; 8.5 percent for Tax Year 2013; 9 percent for Tax Year 2014; 9.5 percent for Tax Year 2015 and where holding period of a security is more than six months but less than 12 months, the rate of tax would be 10 percent for the Tax Year 2016. Where holding period of a security is more than one year, rate of tax would be zero percent.
The FBR has also clarified imposition of the Capital Gains Tax payable by the insurance companies. Rules (6B) and (6C) have been introduced under the Fourth Schedule of the Income Tax Ordinance, 2001, for levy of CGT on disposal of securities by insurance Companies. The "Securities" shall have the same meaning as defined under Section 37A.
The CGT on insurance companies is chargeable at the following rates: Where withholding period of securities is less than six months, rate of tax would be 10 percent for Tax Year 2011; 12.5 percent for Tax Year 2012; 15 percent for Tax Year 2013; 17.5 percent for Tax Year 2015 and where withholding period of securities is less than six months, rate of tax would be 17.5 percent for Tax Year 2015.
Where withholding period of securities is more than six months but less than 12 months, rate of tax would be 8 percent for Tax Year 2011; 8.5 percent for Tax Year 2012; 9 percent for Tax Year 2013; 9.5 percent for Tax Year 2014 and where withholding period of securities is more than six months but less than 12 months, rate of tax would be 10 percent for Tax Year 2015. The FBR has further clarified that no CGT shall be chargeable on disposal of securities held for a period of more than one year by an insurance company. The loss on disposal of securities sustained in a tax year shall be set off only against the gain from any other securities chargeable to tax in the hands of such insurance company. No loss shall be carried forward to the subsequent tax year, income tax circular added
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The FBR has also announced that the capital gains on disposal of securities will be taxed as a separate block of income and shall be charged on capital gain arising to securities holders irrespective of taxpayer's tax (exemption) status. According to the explanatory circular on CGT issued by the FBR here on Friday, the government has also imposed capital gains tax (CGT) on disposal of securities by insurance companies.
The FBR has further clarified that the exemption from CGT available to a collective investment scheme registered with SECP/mutual fund has been restricted only to the investment by such schemes/funds, which are debt or money market funds. Explaining the tax on capital gains on disposal of securities, the FBR said that on expiry of exemption on tax on capital gains, capital gains arising on disposal of securities have been made chargeable to capital gains tax through newly introduced section 37A of the Income Tax Ordinance 2001.
For the purposes of capital gain tax (CGT), "securities" mean share of a public company, voucher of Pakistan Telecommunication Corporation, Modaraba Certificate, an instrument of redeemable capital and derivative products. The Capital gain tax shall be chargeable on capital gain arising from securities disposed off on or after July 1, 2010. However, the capital gain tax shall not be chargeable on disposal of securities, which are held for a period of more than one year.
The adjustment of losses on disposal of securities in a tax year shall be adjustable only against the gain from disposal of any other securities and such loss shall not be carried forward to a subsequent tax year. About the applicability of the CGT on banking company and on insurance company, the FBR said that the provision of section 37AA are not applicable to an insurance company and a banking company as CGT in these cases is governed under the provisions of Fourth Schedule and the Seventh Schedule to the Income Tax Ordinance 2001, respectively.
The explanatory circular said that a new proviso has been inserted under clause (103) Part-I of the Second Schedule to the Income Tax Ordinance, 2001whereby exemption from CGT available to a collective investment scheme registered with SECP/mutual fund has been restricted only to the investment by such schemes/funds which are debt or money market funds. Thus CGT is now chargeable on the unit holders of such schemes/funds at the time of redemption of a security by the unit holder and a collective investment scheme/mutual fund shall be responsible to deduct tax (at the prescribed CGT rates as given below) on redemption of securities. Such tax shall be adjustable against the overall CGT liability, and tax so deducted shall be payable to the relevant Commissioner Inland Revenue within seven days of its deduction.
The rate of capital gain tax under section 37A as specified in Division VII of Part I of the First Schedule to the Income Tax Ordinance, 2001 are as follows: Where holding period of a security is less than six months, rate of tax would be 10 percent for Tax Year 2011. Where holding period of a security is less than six months, rate of tax would be 10 percent for Tax Year 2012; 12.5 percent tax for tax year 2013; 15 percent for tax year 2014 and where holding period of a security is less than six months, rate of tax would be 17.5 percent for tax year 2015.
Where holding period of a security is more than six months but less than 12 months, the rate of tax would be 7.5 percent for the Tax Year 2011; 8 percent for the Tax Year 2012; 8.5 percent for Tax Year 2013; 9 percent for Tax Year 2014; 9.5 percent for Tax Year 2015 and where holding period of a security is more than six months but less than 12 months, the rate of tax would be 10 percent for the Tax Year 2016. Where holding period of a security is more than one year, rate of tax would be zero percent.
The FBR has also clarified imposition of the Capital Gains Tax payable by the insurance companies. Rules (6B) and (6C) have been introduced under the Fourth Schedule of the Income Tax Ordinance, 2001, for levy of CGT on disposal of securities by insurance Companies. The "Securities" shall have the same meaning as defined under Section 37A.
The CGT on insurance companies is chargeable at the following rates: Where withholding period of securities is less than six months, rate of tax would be 10 percent for Tax Year 2011; 12.5 percent for Tax Year 2012; 15 percent for Tax Year 2013; 17.5 percent for Tax Year 2015 and where withholding period of securities is less than six months, rate of tax would be 17.5 percent for Tax Year 2015.
Where withholding period of securities is more than six months but less than 12 months, rate of tax would be 8 percent for Tax Year 2011; 8.5 percent for Tax Year 2012; 9 percent for Tax Year 2013; 9.5 percent for Tax Year 2014 and where withholding period of securities is more than six months but less than 12 months, rate of tax would be 10 percent for Tax Year 2015. The FBR has further clarified that no CGT shall be chargeable on disposal of securities held for a period of more than one year by an insurance company. The loss on disposal of securities sustained in a tax year shall be set off only against the gain from any other securities chargeable to tax in the hands of such insurance company. No loss shall be carried forward to the subsequent tax year, income tax circular added
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