The Pakistan Stock Exchange (PSX) has put forth a groundbreaking proposal, suggesting a 5% Capital Gains Tax (CGT) for all derivatives and future contracts traded on the stock exchange.
This move, outlined in the proposals for the upcoming budget 2024-25, aims to align the taxation framework for these financial instruments with global standards while fostering the development of a robust and efficient derivative market in Pakistan.
In advocating for the 5% CGT rate, the PSX draws parallels with the tax regime applied to future commodity contracts traded by members of the Pakistan Mercantile Exchange (PMEX). By mirroring the taxation structure of PMEX contracts, the PSX aims to create a level playing field for investors and incentivize participation in derivative trading.
A key rationale behind the proposal lies in the overwhelming dominance of exchange-traded derivatives in global markets relative to traditional cash markets. Through a comprehensive review of both local and international markets, the PSX underscores the disparity in taxation rates between cash settled derivative contracts and their counterparts in the regular market.
For instance, cash settled contracts on PMEX in Pakistan are taxed at a rate of 5% on gains, whereas derivative contracts on exchanges like Borsa Istanbul enjoy exemption from CGT altogether. The PSX emphasizes the need to rectify this discrepancy and ensure consistent treatment for derivative products across different trading platforms.
The PSX further highlights the historical taxation incentive extended to cash settled futures contracts on its platform, which has lapsed since 2020. Currently, all derivatives and future contracts traded on the PSX are subject to higher CGT rates, underscoring the urgency to realign the tax structure with future commodity contracts traded at PMEX.
Beyond taxation considerations, exchange-traded derivatives are positioned as superior alternatives to leveraged trading platforms prevalent in the Pakistani market. The Derivative Market Review Committee, constituted by the Securities and Exchange Commission of Pakistan (SECP) in 2016, had recommended phasing out leverage products in favor of derivative products, reflecting broader regulatory support for the development of derivative markets.
Moreover, the Asian Development Bank (ADB), in its Capital Market Development Plan 2020-2027 endorsed by the Ministry of Finance, has underscored the importance of establishing a modern derivative market. By advocating for favorable treatment of all derivatives and futures, including cash settled contracts, the PSX aligns with the overarching goal of fostering market development and enhancing investor participation.
As stakeholders await the outcome of the budget deliberations, the PSX’s proposal stands as a pivotal step towards fostering a conducive environment for derivative trading in Pakistan. By harmonizing taxation rates and promoting regulatory alignment with global best practices, the PSX aims to catalyze the growth of a vibrant and resilient derivative market, unlocking new avenues for investment and economic prosperity.
