Bonus shares: SECP suggests FBR to withdraw 5 percent tax, apply 12.5 percent CGT

The Securities and Exchange Commission of Pakistan (SECP) has proposed to the Federal Board of Revenue (FBR) to withdraw 5 percent tax on bonus shares and apply current capital gains tax (CGT) rate of 12.5 percent irrespective of its holding period.

According to the budget proposals of the SECP received at the FBR House, the rationale behind the budget proposal is to eliminate tax avoidance by investors due to holding period under the CGT regime. It has been proposed that withdrawal 5 percent tax on Bonus shares will restart bonus issuance by the companies which will be taxed under CGT for all times to come, it proposed.

For the Mutual Funds industry, the SECP proposed realisation of income by corporate investors from Money/Income Funds to be taxed at the applicable rate of 25 percent instead of 12.5 percent irrespective of mode whether realized through dividend or redemption in phased manner in next three years: For 2015-16, the proposed rate of tax is 15 percent; 2016-17 proposed rate of tax 0 percent and for 2017-18 the proposed rate of tax is 25 percent.

The SECP proposed that no tax on principal component of investment returned as part of dividend distribution in case of open end mutual fund to maintain uniformity in net asset value (NAV) for issuance and redemption. The SECP has also proposed elimination of 16 percent FED on mutual Funds as mutual funds are already subject to (16 percent Punjab – 15 percent Sindh) sales tax. There would be double taxation on unit holders of mutual funds applicable since July 1, 2014. It also proposed elimination of WWF @ 2 percent on mutual funds income applicable since 2008 – FBR is acting as collecting agent. Mutual Funds are not an establishment & do not employ any workers. Ministry of Labour has clarified that Mutual Funds do not come under WWF Ordinance. Therefore, the FBR should not demand WWF from mutual funds.

The SECP has also proposed to extend the existing exemption given to the seller of property to a Real Estate Investment Trust (REIT) scheme up to 2020 for not taxing the gain on sale of property which already exist up to June 2015. The exemption to REIT from advance tax is applicable at the rate of 1 percent on purchase of immovable property since July, 2014. For commodity exchange, the SECP has proposed that imposition of capital gain tax on transactions carried out on Pakistan Mercantile Exchange (PMEX) at proposed rate of 7.5 percent, the SECP added.