Section 100B of Income Tax Ordinance, 2001 presents a special provision outlining the computation of capital gain tax on listed securities, ushering in a more structured approach to the taxation of gains derived from stock market transactions.
The updated Income Tax Ordinance, 2001, with amendments, was issued by the Federal Board of Revenue (FBR) and is effective from the date of enactment.
In a bid to refine the taxation framework and bring greater clarity to capital gains on the disposal of listed securities, the Finance Act, 2021 introduced a noteworthy amendment to the Income Tax Ordinance, 2001 through Section 100B.
The amended Section 100B reads: “Special provision relating to capital gain tax.— (1) Capital gains on the disposal of listed securities and tax thereon, subject to section 37A, shall be computed, determined, collected and deposited in accordance with the rules laid down in the Eighth Schedule.
(2) The provisions of sub–section (1) shall not apply to the following persons or class of persons, namely:-
(a) a mutual fund;
(b) banking company, a non-banking finance company and an insurance company subject to tax under the Fourth Schedule;
(c) a modaraba;
(d) a company, in respect of debt securities only; and
(e) any other person or class of persons notified by the Board.”
This provision fundamentally focuses on the computation, determination, collection, and deposit of capital gains tax arising from the disposal of listed securities. It establishes a distinct set of rules, detailed in the Eighth Schedule, specifically designed to govern the taxation of capital gains derived from transactions involving listed securities.
A significant feature of Section 100B is the exemption granted to certain entities and classes of persons. Subsection (2) outlines the categories exempted from the provisions of subsection (1). The exempted entities include:
(a) Mutual funds (b) Banking companies, non-banking finance companies, and insurance companies subject to tax under the Fourth Schedule (c) Modarabas (d) Companies, but exclusively in respect of debt securities (e) Any other person or class of persons as notified by the Board
This tailored approach acknowledges the diverse nature of market participants and ensures that the tax treatment aligns with the specific characteristics of each category.
The amendment is seen as a strategic move to foster a more investor-friendly environment and to encourage participation in the stock market. By introducing a specialized framework for the computation of capital gains tax on listed securities, the legislation aims to simplify procedures, enhance transparency, and streamline tax compliance in the realm of securities trading.
While stakeholders generally welcome the effort to create a more nuanced and targeted taxation approach, some industry experts call for vigilance in monitoring any additional notifications by the Board that may further impact market participants.
The introduction of Section 100B into the Income Tax Ordinance, 2001 represents a pivotal step towards establishing a specialized and clear-cut framework for the computation of capital gains tax on listed securities. By tailoring the tax treatment to the unique characteristics of different market participants, this amendment is poised to contribute to a more transparent, efficient, and equitable taxation regime for transactions in the stock market.
