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Fresh move against capital gains tax
Stock market players, who should have been preparing by now to pay their third tranche of advance capital gains tax, are manoeuvring to delay tax recovery by seeking amendments to its new rules notified by the Federal Board of Revenue after a delay of almost eight months.
The CGT was levied on stock investments in the last budget.
Strangely enough, the government, which seldom considers the convenience of prospective taxpayers in the imposition of other taxes, has assured the brokers to make amendments to rules that could possibly provide them loopholes to evade some of their capital gains tax liabilities.
Suggested amendments to the rules promise convenience both for the FBR officials and market players. The FBR officials will ease some of the pressure brokers have put on them through top political bosses. The market players could secure certain tax evasion tools, of course, with the help of the FBR insiders. It is the general public that may soon be asked to pay more under 15 per cent flood tax, 2.5 per cent duty on imports and RGST as a price of this convenience.
The FBR took more than seven months to make the rules and missed two quarterly installments of CGT. The ministries of finance and law, which usually vet the language of the FBR SROs without investigation into their tax policy content, took extra pains to peel apart CGT rules and raised objections as to why the final rules differed from the initial draft placed on the FBRs website for public comment.
When the FBR convinced the ministry of finance about the reasons and issued the rules, some of the big market players who were resisting the rules in background came to the forefront and slammed the rules with the same argument that the rules in their final shape differed from the initial draft offered for public feedback.
The market players have objected to the exclusion of certain provisions of the initial draft which have been dropped from the final rules.
One provision of the draft which has been dropped from the CGT rules is the permission to deduct security acquisition charges from the capital gains. The internationally accepted definition of capital gain or lossthe difference between sale price and purchase price of a security does not allow deduction of security acquisition expenses from capital gain.
Moreover, provisions of the Income Tax Ordinance, 2001 do not allow any such deductions from capital gains to reduce capital gain tax liability. The market players insist on incorporation of this provision in the rules so as to get an opportunity to reduce the size of their capital gains and evade their tax liabilities.
Some of the new provisions which have been added in the final version of CGT rules include the requirement to furnish tax clearance certificate before closing the brokerage account, maintenance of certain records and specification of formats to calculate the payable capital gain tax.
These are precisely the provisions which have taken away from the market players almost every opportunity to evade payment of due tax on their capital gains.
With CGT rules in place, trading volumes in stock market plunged indicating declining participation and rising exits from market. Strenuous efforts of market players resulted in approval of leverage under which an investor could replace 75 per cent of his black money invested in stock market with borrowed money. Falling stock market volumes and an outcry for leverage product are some of the subtle methodologies of market players to defeat the objectives of new levy. Tax clearance provisions of the Rule 13J close the back doors to runaway from the market without due discharge of tax payment obligations.
The record maintenance provisions of the Rule 13 (I) make the concealment of any part of capital gain tax liability a difficult task for the market players. Moreover, specification of formats to calculate the payable capital gains tax makes it almost impossible for the market players to keep part of their market transactions off-the-record. These are some of the provisions of rules which have shattered the hopes of market players to evade the payment of CGT and then build their case in the next budget that CGT is not worth the levy as it has yielded nominal collection.
The provisions of the Rule 13F disallowing adjustment of capital loss against capital gain in three specified situations have made the common strategies of wash sales, cross trades and tax swap sales ineffective for the purpose of minimising CGT payments. These three strategies are market players common tools to bring deceptive volume and price movements in stocks which they hold and which they want to offload by giving the other market participants a false impression of rising price and volume.
In a market which is subject to the levy of capital gain tax, the same three techniques serve the dual purpose of inducing deceptive price movements and creating artificial capital losses to use the same as a set off against capital gains and minimise the CGT payments. The provisions of rules which disallow the adjustment of such artificially created capital losses against gains have effectively closed the door which could drain a substantial part of payable capital gains tax. These provisions were part of the initial draft also and are among those most disliked by the market participants.
The brokers now claim that income tax ordinance (Section 37A(5) allows adjustment of capital loss against capital gain, which has been contradicted in the CGT rules in case of wash sales, cross sales and tax swap sales.
The FBRs legal minds, however, say the capital loss which can be used as a set off against capital gain (under the income tax law) is the one which an investor sustains for reasons beyond his control and is the real financial loss. The CGT rules do not allow adjustment against a loss which the investor himself creates for financial gain through wash sales, cross trades and tax swap sales.
The FBR has made a serious effort to plug all possible loopholes which could be employed to minimise and evade the CGT payment. Now it should resist undoing the effort by introducing in the CGT rules certain amendments which will provide the stock investors effective tax evasion loopholes.
Fresh move against capital gains tax | Magzines | DAWN.COM
Stock market players, who should have been preparing by now to pay their third tranche of advance capital gains tax, are manoeuvring to delay tax recovery by seeking amendments to its new rules notified by the Federal Board of Revenue after a delay of almost eight months.
The CGT was levied on stock investments in the last budget.
Strangely enough, the government, which seldom considers the convenience of prospective taxpayers in the imposition of other taxes, has assured the brokers to make amendments to rules that could possibly provide them loopholes to evade some of their capital gains tax liabilities.
Suggested amendments to the rules promise convenience both for the FBR officials and market players. The FBR officials will ease some of the pressure brokers have put on them through top political bosses. The market players could secure certain tax evasion tools, of course, with the help of the FBR insiders. It is the general public that may soon be asked to pay more under 15 per cent flood tax, 2.5 per cent duty on imports and RGST as a price of this convenience.
The FBR took more than seven months to make the rules and missed two quarterly installments of CGT. The ministries of finance and law, which usually vet the language of the FBR SROs without investigation into their tax policy content, took extra pains to peel apart CGT rules and raised objections as to why the final rules differed from the initial draft placed on the FBRs website for public comment.
When the FBR convinced the ministry of finance about the reasons and issued the rules, some of the big market players who were resisting the rules in background came to the forefront and slammed the rules with the same argument that the rules in their final shape differed from the initial draft offered for public feedback.
The market players have objected to the exclusion of certain provisions of the initial draft which have been dropped from the final rules.
One provision of the draft which has been dropped from the CGT rules is the permission to deduct security acquisition charges from the capital gains. The internationally accepted definition of capital gain or lossthe difference between sale price and purchase price of a security does not allow deduction of security acquisition expenses from capital gain.
Moreover, provisions of the Income Tax Ordinance, 2001 do not allow any such deductions from capital gains to reduce capital gain tax liability. The market players insist on incorporation of this provision in the rules so as to get an opportunity to reduce the size of their capital gains and evade their tax liabilities.
Some of the new provisions which have been added in the final version of CGT rules include the requirement to furnish tax clearance certificate before closing the brokerage account, maintenance of certain records and specification of formats to calculate the payable capital gain tax.
These are precisely the provisions which have taken away from the market players almost every opportunity to evade payment of due tax on their capital gains.
With CGT rules in place, trading volumes in stock market plunged indicating declining participation and rising exits from market. Strenuous efforts of market players resulted in approval of leverage under which an investor could replace 75 per cent of his black money invested in stock market with borrowed money. Falling stock market volumes and an outcry for leverage product are some of the subtle methodologies of market players to defeat the objectives of new levy. Tax clearance provisions of the Rule 13J close the back doors to runaway from the market without due discharge of tax payment obligations.
The record maintenance provisions of the Rule 13 (I) make the concealment of any part of capital gain tax liability a difficult task for the market players. Moreover, specification of formats to calculate the payable capital gains tax makes it almost impossible for the market players to keep part of their market transactions off-the-record. These are some of the provisions of rules which have shattered the hopes of market players to evade the payment of CGT and then build their case in the next budget that CGT is not worth the levy as it has yielded nominal collection.
The provisions of the Rule 13F disallowing adjustment of capital loss against capital gain in three specified situations have made the common strategies of wash sales, cross trades and tax swap sales ineffective for the purpose of minimising CGT payments. These three strategies are market players common tools to bring deceptive volume and price movements in stocks which they hold and which they want to offload by giving the other market participants a false impression of rising price and volume.
In a market which is subject to the levy of capital gain tax, the same three techniques serve the dual purpose of inducing deceptive price movements and creating artificial capital losses to use the same as a set off against capital gains and minimise the CGT payments. The provisions of rules which disallow the adjustment of such artificially created capital losses against gains have effectively closed the door which could drain a substantial part of payable capital gains tax. These provisions were part of the initial draft also and are among those most disliked by the market participants.
The brokers now claim that income tax ordinance (Section 37A(5) allows adjustment of capital loss against capital gain, which has been contradicted in the CGT rules in case of wash sales, cross sales and tax swap sales.
The FBRs legal minds, however, say the capital loss which can be used as a set off against capital gain (under the income tax law) is the one which an investor sustains for reasons beyond his control and is the real financial loss. The CGT rules do not allow adjustment against a loss which the investor himself creates for financial gain through wash sales, cross trades and tax swap sales.
The FBR has made a serious effort to plug all possible loopholes which could be employed to minimise and evade the CGT payment. Now it should resist undoing the effort by introducing in the CGT rules certain amendments which will provide the stock investors effective tax evasion loopholes.
Fresh move against capital gains tax | Magzines | DAWN.COM
