New tax rates on capital gains from the sale of securities

ISLAMABAD: The government has proposed new capital gains tax rates on the disposal of securities traded on the Pakistan Stock Exchange (PSX).

Pakistan presented its federal budget on June 10, 2022 and introduced various tax measures to boost revenue collection.

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Through the Finance Bill 2022, it has been proposed to revise the capital gains tax rates for the 2023 tax year and beyond.

Here are the proposed capital gains tax rates:

S. No Holding period Tax rates for tax year 2023 and later
(1) (2) (3)
1. When the holding period does not exceed one year 15%
2. When the holding period is more than one year but not more than two years 12.5%
3. When the holding period is more than two years but not more than three years ten%
4. When the holding period is more than three years but not more than four years 7.5%
5. When the holding period is more than four years but does not exceed five years 5%
6. When the holding period is more than five years but does not exceed six years 2.5%
seven. When the holding period exceeds six years 0%
8. Commodity futures contracts entered into by members of the Pakistan Mercantile Exchange 5%”;

The Federal Board of Revenue (FBR) collects capital gains tax on the disposal of securities under Section 37A of the Income Tax Order of 2001.

Here is the text of Section 37A of the Income Tax Order 2001:

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37A. Capital gain on disposal of securities.—(1) The capital gain realized on or after July 1, 2010, resulting from the disposal of securities, other than a capital gain exempt from tax under this order, is taxable at the rates specified in Division VII of Part I of the First Schedule:

However, this article does not apply to a banking company and an insurance company.

(1A) The gain resulting from the disposal of a security by a person is calculated according to the following formula, namely:

A B

Where –

(i) “A” is the consideration received by the person on assignment of the security interest; and

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(ii) “B” is the acquisition cost of the security.

(2) The holding period of a security, for the purposes of this article, is counted from the date of acquisition (whether before, on or after June 30, 2010) until the date of disposal of this title falling after June 30, 2010.

(3) For the purpose of this section, “Security” means public company stock, Pakistan Telecommunication Corporation bond, Modaraba certificate, callable capital instrument, debt securities, fund unit exchange traded and derivatives.

(3A) For the purposes of this section, “debt securities” means:

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(a) Corporate debt securities such as Term Funding Certificates (TFCs), Sukuk Certificates (Sharia Compliant Bonds), Registered Bonds, Commercial Papers, Term Participation Certificates (PTCs) and all kinds of debt securities issued by any Pakistani or foreign company or corporation registered in Pakistan; and

(b) Government debt securities such as Treasury Bills (T-bills), Federal Investment Bonds (FIB), Pakistan Investment Bonds (PIB), Foreign Currency Bonds, Government Securities, municipal bonds, infrastructure bonds and all kinds of debt securities issued by federal government, provincial governments, local authorities and other statutory bodies.

“Explanation: For the avoidance of doubt, it is clarified that derivatives include future commodity contracts entered into by members of the Pakistan Mercantile Exchange, whether or not they are settled by physical delivery.”

(3B) For the purposes of this section, “shares of a public company” are considered collateral if that company is a public company at the time of the transfer of such shares.

(4) Gain under this section shall be treated as a separate block of income.

(5) Notwithstanding anything in this Order, where a person suffers a loss on the disposal of securities during a tax year, the loss may be deducted only against the person’s gain from any other title taxable under this article and not the loss is carried forward to the following taxation year:

Provided that a portion of the loss incurred on the disposal of securities in the 2019 and subsequent taxation year that has not been deducted from the person’s gain from the disposal of taxable securities under this section be carried forward to the next taxation year and deducted only from the person’s gain from the disposition of taxable securities under this section, but no loss may be carried forward for more than three taxation years immediately following the taxation year for which the loss was first calculated.

(6) To carry out the object of this section, the Commission may prescribe rules.

The rate of tax payable under Section 37A is as follows:

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