PkRevenue.com – Pakistan stock market is jittery over rumors of an increase in capital gains tax (CGT) and dividend tax in the upcoming budget.
Analysts at Topline Securities Limited report a 2.3% decline, or 1764 points, in the Pakistan stock market over the past seven sessions due to these concerns.
Fear of Tax Changes
The worry stems from speculation that the government might raise CGT and dividend tax rates and potentially change how these taxes are treated. Currently, these taxes are considered “full and final,” meaning they are the only tax levied on capital gains and dividends. However, there’s a proposal to shift them to the normal tax regime, where they would be added to an investor’s overall income and taxed based on their income bracket.
Impact on Different Investors
• Individuals: They make up over 70% of the market’s trading activity. Under the current system at Pakistan stock market, they pay a flat 15% CGT and dividend tax. If the tax treatment changes, their tax burden could rise significantly as they wouldn’t be able to deduct expenses from their capital gains and dividend income. This could disproportionately impact smaller investors.
• Companies (including Brokers): These entities contribute around 20% to trading activity. While they might see a theoretical increase in tax liability, companies with lower profits or in losses could benefit from the change.
• Banks and Insurance Companies: These players have a minor presence (4-5%) in the market and already pay normal tax on their capital gains and dividends, so they wouldn’t be affected by the proposed change.
Historical Market Reaction
Analysts at Topline Securities analyzed past budget changes:
• FY15: A 250 basis point increase in CGT (to 12.5%) resulted in a modest 0.61% market decline over ten days.
• FY16: A 250 basis point increase in both CGT and dividend tax saw the market rebound to positive territory (1.5% gain) within ten days after the budget announcement.
• FY18: This year saw a steeper drop (5.9%) following the introduction of a single-tier CGT and a dividend tax hike. However, this decline partly coincided with MSCI reclassifying Pakistan from a frontier market to an emerging market, leading to foreign investment outflows.
The Road Ahead
The potential tax changes raise concerns for Pakistan stock market. While the historical impact of similar changes has been mixed, the proposed shift in tax treatment for individuals could significantly impact their investment decisions. Investors are watching the upcoming budget announcement closely to see if these fears become reality.
