The Income Tax Rules, 2002, under Rule 13N, prescribe a detailed and structured procedure for the computation and collection of capital gains tax (CGT). This rule delineates the roles, responsibilities, and mechanisms involved, primarily focusing on the National Clearing Company of Pakistan Limited (NCCPL) and other related entities.
Applicability and Scope
The provisions of Rule 13N and the Eighth Schedule of the Income Tax Ordinance apply to capital gains derived from listed securities. This framework became effective from April 24, 2012, for most securities and July 1, 2012, for redeemable capital instruments. For Foreign Institutional Investors (FIIs), the rules apply from July 1, 2014, ensuring all investors are subject to the same taxation regime, without exemptions.
Computation of Capital Gains
1. Data Sources: NCCPL calculates capital gains using transaction data obtained from stock exchanges, the Central Depository Company (CDC), Asset Management Companies (AMCs), and the Pakistan Mercantile Exchange (PMEX).
2. Adjustments for Errors: In case of discrepancies in acquisition dates or other critical details, NCCPL can rectify such errors with prior approval from the Commissioner of Inland Revenue.
3. Methodology: Gains are calculated using the First In, First Out (FIFO) method, except for same-day transactions or futures contracts, where the average method is applied.
Collection and Adjustment
NCCPL collects CGT monthly, ensuring adjustments for losses, including carry-forward losses as per Section 37A and relevant sub-rules. For open-ended mutual funds and commodity futures, AMCs and PMEX calculate and deposit CGT, while NCCPL verifies their calculations.
Refunds below PKR 1,000 are carried forward, while higher amounts are adjusted at the year-end. The applicable CGT rates depend on the investor’s status as a filer or non-filer, determined by the Active Taxpayers List (ATL) at the time of transaction.
Handling Losses
• Current Year Losses: Capital losses from listed securities in a financial year are offset against gains from the same year.
• Carry-Forward Losses: Losses from Tax Year 2019 onwards can be carried forward for up to three years, provided the taxpayer appears on the ATL for the relevant year. Adjustments are made on a FIFO basis.
Deductions and Incidental Expenses
NCCPL deducts a percentage from transaction values to account for brokerage, commissions, and other incidental expenses. However, this deduction does not apply to open-ended mutual funds or PMEX transactions. Additionally, financing costs for leveraged products are deducted from gains.
Issuance of Certificates and Reporting
• NCCPL issues annual certificates to taxpayers, verifying their capital gains and tax liabilities within 45 days of the financial year-end.
• Quarterly statements of tax collections are electronically submitted to the Federal Board of Revenue (FBR).
Opt-Out Option
Taxpayers can opt out of the Eighth Schedule’s regime by filing an irrevocable undertaking with NCCPL, supported by the Commissioner’s approval. In such cases, NCCPL reports the taxpayer’s gains and liabilities to the FBR.
Final Provisions
The rules emphasize precision and transparency in CGT collection. For unresolved issues, NCCPL can seek clarifications from the FBR and make necessary adjustments. Additionally, AMCs and PMEX remain accountable for ensuring that any outstanding tax liabilities are reported and settled before account closures.
This systematic procedure ensures fairness, clarity, and compliance, enhancing Pakistan’s tax administration while fostering investor confidence in the financial markets.