Special procedure for capital gain tax computation

Special procedure for capital gain tax computation

ISLAMABAD: Federal Board of Revenue (FBR) has updated special procedure for computation of capital gain tax and collection of tax.

The FBR issued Income Tax Rules, 2002 (Updated up to September 08, 2020) and updated the special procedure.

The special procedure for computation of capital gain and collection of tax has been prescribed under Rule 13N of Income Tax Rules, 2002.

Special procedures for computation of capital gains and collection of tax.-

(1) National Clearing Company of Pakistan Limited (NCCPL) shall, in accordance with this rule, collect tax on capital gains as provided in Eighth Schedule to the Ordinance, hereinafter in this Part called as the said Eight Schedule.

(2) The provisions of the said Eighth Schedule and these rules shall apply to capital gains derived from listed securities on or after the 24th April, 2012, except in the case of instrument of redeemable capital where such provisions shall be applicable on capital gain derived from the 1st July, 2012.

Provided that in case of Foreign Institutional Investors, provisions of the said Eighth Schedule and these rules shall be applicable on capital gain derived from the first day of July, 2014.

Explanation: For the removal of doubt, it is clarified that all Foreign Institutional Investors shall be subject to the regime as laid down in Eighth Schedule and no exemption whatsoever from withholding tax under Eighth Schedule or under these rules is available to Foreign Institutional Investors for any reason.

(3) In computing capital gains, NCCPL shall take into account transactions and their values as reported to or provided to or extracted from the systems or procedures in place with NCCPL, stock exchange and the Central Depository Company of Pakistan Limited, the clearing members in case of Foreign Institutional Investors, Pakistan Mercantile Exchange (PMEX) in case of future commodity contracts and Asset Management Companies in case of open ended mutual funds:

Provided that, where any discrepancy or error is pointed out or found in recording the date of acquisition of security, NCCPL may, with prior approval of the Commissioner Inland Revenue, rectify such date based on the relevant information provided by CDC as obtained from concerned issuer or its share registrar or clearing members in case of Foreign Institutional Investors and accordingly re-compute the capital gain tax liability in the financial year in which such security has been disposed of;

(3A) Notwithstanding the sub-rule (1), Asset Management Companies and PMEX shall continue to determine, compute and collect Capital gains tax on open ended mutual funds and future commodity contracts respectively, and shall deposit the same with NCCPL within ten working days of the month end.

(3B) NCCPL shall verify the liability of the investor calculated by Asset Management Companies and PMEX as above, and will compute the net capital gains tax liability or refund for each investor to be collected from or refunded to the Asset Management Companies or PMEX. Provided that where cumulative refund per investor for the year to date does not exceed Rs 1,000 per investor, it will be carried forward for adjustment in next month(s), however, any refunds, irrespective of amount, shall be refunded at the yearend:

Provided that the information to be reported to or provided to NCCPL as above shall be required to be in a manner and time deemed necessary for NCCPL to discharge its obligation under the law and provisions of Rule 3 and 3A of Eight Schedule to the Ordinance shall be applicable in this respect.

(4) The gain arising on the disposal of a security by a person shall be computed in accordance with the following formula, namely:-

A – B

Where –

A is the consideration received by the person on disposal of the security; and

B is the cost of acquisition of the security.

(5) Capital gain or loss arising on the disposal of listed securities shall be computed on the basis of First In First Out (FIFO) inventory accounting method:

Provided that while applying FIFO method, market based transactions shall be taken into account first:

Provided further that the FIFO method shall not apply in respect of sale of shares purchased on the same trading day or in same futures or derivative contract, except traded on PMEX, and capital gain or loss shall be computed by applying average method:

Provided further that the FIFO shall be applied on aggregate inventory held by an investor at UIN level.

(5A). For the purposes of computation and collection of capital gains tax in this rule applicable rate shall be taken from Division VII of Part I of the First Schedule based on whether the investor is filer or non-filer as per ATL at the time of transaction.

(5B) For the purpose of computation of capital gains tax liability on stock fund the applicable rate of tax as per third proviso of the Division VII of Part I of the First Schedule shall be taken on month on month basis.

(6) Capital loss arising on disposal of listed securities as determined by NCCPL in any financial year shall be set off against capital gain arising from the disposal of securities during that financial year to determine the taxable capital gain arising from the disposal of listed securities.

(7) Capital loss arising on disposal of listed securities in any financial year shall not be carried to a subsequent financial year.

(8) NCCPL shall deduct or add 0.5 percent for client’s trade and 0.25 percent for broker’s proprietary trade of the consideration received on disposal or cost of acquisition of securities respectively, in lieu of brokerage, commission, transaction fee, levy, Laga or any other similar incidental expenses incurred by the person while disposing or acquiring a security, subject to the condition that such deduction shall only be allowed in respect of market based transactions6:

Provided that the above deductions shall not be applicable in case of units of open ended mutual funds and future contracts entered into by the members of PMEX.

(9) NCCPL shall also deduct financing cost from the consideration received if financing is availed through NCCPL’s leveraged market products.

(10) NCCPL shall collect an amount as computed in the manner laid down in the said Eighth Schedule and these rules on monthly basis in respect of transactions settled in a month, after adjustment of losses and repayment of amount collected in previous month or months of same financial year, to ensure that at the end of any given month NCCPL possesses an amount equal to the estimated amount of tax liability on capital gains.

(11) Amount computed in the manner laid down in the said Eighth Schedule and these rules shall be collected by NCCPL from or through the clearing member PMEX and Asset Management Companies on net capital gains derived by person, taxable under the said Eighth Schedule.

(12) Any person, if not satisfied with the computation of capital gain or tax thereon or both made by NCCPL for the purpose of the said Eighth Schedule, such person may re-compute the capital gain and lodge claim of refund, if any, with the Commissioner after filing of return of income and the Commissioner shall refund the amount of tax in accordance with provisions of Part VI of Chapter X of the Ordinance.

(13) For the purpose of the said Eighth Schedule and this rule, the provisions of rules 13F, 13H and 13I shall not apply.

(14) The provisions of rule 13J shall not apply to the person whose tax liability on capital gains is discharged under the said Eighth Schedule, however the brokerage account of the investor, account of unit holder of open ended mutual fund with Asset Management Companies and account of member of PMEX as the case may be shall not be closed until and unless such person obtains a clearance certificate from NCCPL:

Provided that accounts of unit holders of open ended mutual funds with Asset Management Companies and account of member of PMEX, if closed without obtaining clearance certificate from NCCPL, Asset Management Company or PMEX shall remain responsible to ensure that any outstanding liability in respect of Capital Gain Tax which has arisen or may arise, has been collected from respective investor and deposited with NCCPL:

Provided further that in case Asset Management Company or PMEX is unable to recover such tax from investor, these non-payments should be reported on monthly basis to NCCPL for onward reporting to Board in terms of rule 6(3) of the Eight Schedule to the Ordinance.

(15) NCCPL shall issue certificate as provided in clause (4) of rule 1 of the said Eighth Schedule, as set out in Part I of rule 13O, verifying capital gains and tax thereon, if any, to each person subject to tax under the said Eighth Schedule within thirty days from the end of the financial year.

(16) NCCPL shall furnish electronically to the Board a quarterly statement of amount collected, within thirty days from the end of each quarter as set out in Part II of rule 13O.

(17) The person who has opted out of the scheme of taxation provided in the said Eighth Schedule shall file an undertaking to NCCPL in the form prescribed in Part III of rule 13O along with the evidence of obtaining prior approval of Commissioner under rule 5 of the said Eighth Schedule.

Provided that the Commissioner shall not accord prior approval, unless the taxpayer is a filer

(18) Statements referred in rule 2 of the said Eighth Schedule shall be furnished on the format prescribed in Part IV of rule 13O.

(18A) Where an irrevocable option has been filed to NCCPL by a person, after obtaining prior approval of the Commissioner to opt out of Eighth Schedule for determination and payment of capital gains tax, NCCPL shall submit to the Board details of capital gains and tax thereon of such person or persons for the tax year or part thereof in respect of which capital gain tax collection has not been made by NCCPL.

(19) The period of forty-five days or one hundred twenty days, as the case may be, as referred in rule 2 of the said Eighth Schedule, shall be the period or periods in aggregate to, forty-five days or one hundred twenty days, as the case may be, during the period as provided in rule 2(1)(b) and 2(2)(b) of the said Eight Schedule.

(20) For the purpose of rule 2 of the said Eighth Schedule, the investment shall be the time weighted average of the invested amount arranged in descending order for forty-five days or one hundred twenty days, as the case may be. The amount of investment at any particular day shall be netted off with the market value of net open sale position in futures and derivative contract of the same security to the extent of the amount of investment representing such security, before calculating aforementioned time weighted average.

(21) For the purpose of clarity in computing, determining, collecting and depositing the tax on capital gains by Asset Management Companies and PMEX capital gains by NCCPL, certain transactions and their tax treatments as well as the amount and period of investment referred to in rule 2 of the said Eighth Schedule are as enunciated in rule 13P:

Provided that in case of any confusion in respect of such computation, determination, collection or deposit, NCCPL, after computing, determining, collecting or depositing, may refer the case to the Board for clarification and make adjustments, if required, after such clarification.

(22) Definitions

For the purposes of this part,-

(a) “clearing member” shall have meaning as defined in NCCPL Regulations, 2003;

(b) “leveraged market” shall have the meaning as defined in the Securities (Leveraged Markets and Pledging) Rules, 2011;

(c) “market based transaction” means transaction executed at any registered stock exchange in Pakistan or NCCPL’s platform; and

(d) “UIN” means Unique Identification Number as defined in NCCPL Regulations, 2003.

(23) Notwithstanding anything contained in these rules, for the purpose of computation of capital gains and collection of tax thereon, the date of acquisition, except in the case of foreign institutional investors, and disposal, the consideration received and cost of acquisition shall be determined in the following manner, namely:-

(a) for the purpose of computation of capital gains, securities held on the 23rd April, 2011 shall be deemed as having held for a period of more than one year and the cost of such securities shall be deemed to be the market price (day-end price) of the securities, as on the 23rd April 2011;

(b) where physical securities have been deposited in an account maintained with Central Depository Company of Pakistan Limited between the 24th April, 2011 and the 23rd April, 2012 (both days inclusive), the date of acquisition of such securities shall be deemed as the 23rd April, 2011 and the cost of securities shall be deemed as market price (day-end price) as on the 23rd April, 2011;

(c) where securities have been acquired or disposed between the 24th April, 2011 and the 23rd April, 2012 (both days inclusive), the cost of acquisition and consideration received for disposal shall be determined in the following manner, namely:-

(i) in case of market-based transactions, the transaction price of the securities;

(ii) in case of transactions other than market-based transactions deal price provided by the stock exchange; and

(iii) in all other cases, the market price (day-end price);

(d) where physical securities are deposited on or after the 24th April, 2012 in an account maintained with Central Depository Company of Pakistan Limited, the actual date of acquisition and market price (day-end price) prevailing on such date shall be taken into account for computation of capital gains tax;

(dd) where securities of unlisted company are converted into listed form, the cost of acquisition of such securities shall be the market price at which the security is listed on the stock exchange and the date of acquisition shall be the date of acquisition as available with CDC:

Provided that cost of acquisition of securities in case of securities acquired during book building process and initial public offer (IPO) period shall be the applicable IPO price.”; and

(e) in all other cases, where actual or deal price is not known to NCCPL, the market price (day-end price) shall be taken into account for computation of capital gains tax.

(24) Notwithstanding anything contained in these rules, for the purpose of computation of capital gains and collection of tax thereon with respect to foreign institutional investors, the date of acquisition and disposal, the consideration received and cost of acquisition shall be determined in the following manner, namely:-

(a) for the purpose of computation of capital gains, securities held on the 30th June, 2012 shall be deemed as having held for a period of more than two years and the cost of such securities shall be deemed to be the market price (day-end price) of the securities, as on the 30th June 2012;

(b) where securities have been acquired or disposed of between the 1st July, 2012 and the 30th June, 2014 (both days inclusive), the cost of acquisition and consideration received for disposal shall be determined in the following manner, namely:-

(i) in case of market-based transactions, the transaction price of the securities;

(ii) in case of transactions other than market-based transactions deal price provided by the stock exchange; and

(iii) in all other cases, the market price (day-end price);

(c) where physical securities are deposited on or after the 1st July, 2014 in an account maintained with Central Depository Company of Pakistan Limited, date and cost of acquisition shall be taken into account as follows:-

(i) the actual date of acquisition and market price (day-end price) prevailing on such date shall be taken into account for computation of capital gains tax, where such securities are acquired after April 23, 2011; and

(ii) the cost of such securities and date of acquisition shall be deemed to be the market price (day-end price) of the securities, as on the 23rd April 2011, where such securities are acquired on or before April 23, 2011; and

(iii) in all other cases, where actual or deal price is not known to NCCPL, the market price (day-end price) shall be taken into account for computation of capital gains tax.

(25) Foreign Institutional Investor may apply to NCCPL for separate Unique Identification Numbers (UIN) for each of its sub-funds under its umbrella.

(26) Where separate UINs have been obtained by Foreign Institutional Investor for each of the sub-funds under its umbrella, capital gain or loss shall be computed separately for each sub-fund and loss under one UIN shall not be allowed to be set off against capital gain arising to another sub- fund with separate UIN.

(27) Where a Foreign Institutional Investor opts not to apply to NCCPL under sub-rule (25), loss arising to any sub-fund shall not be allowed to be set off against capital gain of any sub- fund. However, such loss of a sub-fund may be adjusted against gain arising to such sub-fund at the time of filing of return by the sub-fund.

(28) A new UIN shall not be assigned to unit holders of open ended mutual funds and members of PMEX if they already have been assigned a UIN by NCCPL.

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