In a significant fiscal policy shift, the Finance Bill 2024 has proposed an increase in the capital gains tax (CGT) on the disposal of securities. Effective for securities acquired on or after July 1, 2024, the tax rate for gains realized by individuals appearing on the Active Taxpayers’ List (ATL) at both the time of acquisition and disposal will be set at 15 percent. This development marks a substantial change aimed at enhancing revenue collection from the financial sector.
Tax experts at KPMG Taseer Hadi & Co. highlighted that for individuals not listed on the ATL at both critical dates, gains from securities will be taxed at the progressive slab rate specified in Division I for individuals and Associations of Persons (AOP), with a minimum threshold of 15 percent. Corporate entities will see their gains taxed at the corporate rate specified in Division II. This ensures that non-ATL individuals face a tax rate that is never below 15 percent, aligning with the government’s strategy to encourage tax compliance.
Furthermore, the Finance Bill proposes the removal of certain clauses in the existing law, deemed redundant and without practical impact. This streamlining effort is part of a broader initiative to simplify the tax code and eliminate unnecessary provisions.
Significant changes are also proposed for the tax rates applicable to mutual funds, collective investment schemes, and Real Estate Investment Trust (REIT) schemes. For individuals and AOPs, the current CGT rate on redemption of securities held in stock or other funds will increase from 10 percent to 15 percent. For corporate entities, the rate will remain at 15 percent for stock funds, but for other funds, it will stay at the current rate of 25 percent.
Additionally, a noteworthy adjustment has been suggested for stock funds with dividend receipts lower than capital gains. The tax deduction rate for such funds will rise from 12.5 percent to 20 percent. This aims to address disparities in the tax treatment of different income streams within investment funds, ensuring a more balanced and equitable tax system.
Currently, no capital gains tax is levied if the holding period of securities exceeds six years. However, the Finance Bill 2024 proposes that this exemption only applies to securities acquired on or before June 30, 2024. This implies that securities acquired after this date may be subject to CGT regardless of the holding period, potentially impacting long-term investment strategies.
These proposed changes reflect the government’s commitment to broadening the tax base and increasing revenues through more rigorous taxation of financial gains. If enacted, they will have wide-reaching implications for investors and financial institutions, necessitating careful planning and compliance adjustments.