FBR urged to allow CGT exemption to private companies

FBR urged to allow CGT exemption to private companies

KARACHI: Tax practitioners have demanded the Federal Board of Revenue (FBR) to allow capital gain tax (CGT) exemption to private companies in order to encourage corporatization in the country.

The Karachi Tax Bar Association (KTBA) in its proposals for budget 2021/2022, pointed out that as per section 37, gain on sale of shares of private companies shares is taxed at corporate tax rate.

“This gain is reduced by 25 percent in case the holding period is more than one year,” the tax bar said.

In case of gain on disposal of immovable property, the gain is exempt in case the holding period is more than 4 years.

In case of capital gain on securities under section 37A, the gain is exempt on securities acquired before 1 July 2012.

“Hence, investment in shares of private companies stands at comparative disadvantage,” the KTBA added.

It is proposed that the gain on sale of private company shares should also be allowed exemption in case if the holding period is 10 years or more.

The proposal has been submitted in order to encourage and benefit corporatization of business.

The tax bar also highlighted that as per definition of dividend the distribution made by a company to its shareholders on reduction of capital shall be deemed dividend.

This situation is generally referred to as buy-back of shares. On the other hand, under Rule 13P of the Income Tax Rules, 2002, the shares buy-back transaction is treated as Capital Gains.

Thus, there exists a contradiction among the provisions of Ordinance and Rules.

Contradictory provisions in law that needs to be corrected, the KTBA suggested. It is proposed that following exclusion after clause (f) in subsection (19) of section 2 be inserted:

“Any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 88 of the Companies Act, 2017 (XIX of 2017)”.