Finance Act 2014: mechanism to tax capital gains on disposal of securities

KARACHI: The Federal Board of Revenue (FBR) on Thursday issued explanation to Finance Act 2014 regarding amendments to taxation on capital gains on disposal of securities.
Relevant sections: Section 37A, Section 100B, Division VII of Part I of First Schedule of Income Tax Ordinance, 2001.
The FBR said that a number of amendments have been made in the regime of capital gains taxation on disposal of securities, namely.-
— Inclusion of Debt Securities in the definition of Security
— Extension in the holding period for taxability
— Rationalization of tax rates
— Bringing Foreign Institutional investors into tax net
By including debt securities in the definition of security in section 37A, the gain/loss on disposal of debt securities shall be computed, collected and paid into national exchequer using the NCCPL’s mechanism as laid down in the Eight Schedule to the Ordinance, unless opted out with the approval of the Commissioner.
However, companies shall not be subjected to this regime[section 100B(2)(d)] and will continue to be taxed as in the past with the rates applicable to companies and not the rates as amended in Division VII of Part I of First Schedule.
Individuals, on the other hand, trading debt securities shall be subject to mechanism as laid down in the Eight Schedule to the Ordinance.
Secondly, securities were subject to tax if these were held for a period of less than 12 months. Through Finance Act, 2014, securities held for a period between 12 and 24 months have also been made taxable under the Ordinance, at a rate of 10 percent. However, securities held for a period of more than 24 months shall continue to be taxed at 0 percent.
Third, previously the rates of tax for securities held up to 6 months and 12 months stood increased to 17.5 percent and 9.5 percent respectively for tax year 2015 and onwards. In order to ensure continued buoyancy prevailing, at present, in the stock markets and to save the capital markets from withdrawal of investments, capital gains tax rates have been rationalized.
Through Finance Act, 2014, the rates have been revised and for securities held up to one year, capital gains tax shall be 12.5 percent, and for securities held between 12 and 24 months, the rate shall be 10 percent.
Lastly, as Eight Schedule was not applicable to Foreign Institutional Investors investing
in Stock Exchange and NCCPL was not required to collect tax from them in view of section 100B(2)(d), it was expected that Foreign Institutional Investors will file their returns to declare their gains. However, since no return was being filed, nor was it possible to enforce their returns, Foreign Institutional Investors have been brought into tax net by amending section 100B and tax shall now be collected using NCCPL’s mechanism as laid down in the Eight Schedule to the Ordinance.

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