Tax Makeover: Capital Gains on Securities and Shares Get Fresh Look

Tax Makeover: Capital Gains on Securities and Shares Get Fresh Look

Karachi, July 26, 2023 – The Federal Board of Revenue (FBR) has announced significant tax amendments pertaining to capital gains on securities and shares through an official notification, Circular No. 2 of Income Tax.

These amendments, introduced via the Finance Act, 2023, bring changes to the Income Tax Ordinance, 2001.

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The newly inserted sub-sections (6) to (10) in section 37 of the Income Tax Ordinance introduce provisions for the deduction of tax on the sale of shares transactions, excluding those covered under section 37A.

According to the amendments, the acquirer of the capital asset, which refers to shares of the company (excluding shares of companies listed on a registered stock exchange and settled by the National Clearing Company of Pakistan Limited – NCCPL), is now required to deduct an advance adjustable tax at a rate of 10% from the gross amount of the sale consideration at the fair market value of the shares.

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It’s important to note that the fair market value of shares will be determined without deduction of liabilities, as specified in sub-section (4) of section 101A of the Ordinance.

The person acquiring the shares has the option to request a certificate of exemption or a reduced rate certificate from the Commissioner with jurisdiction over the transaction, provided they believe the sale of shares is either exempt or subject to a reduced rate of tax under any of the provisions of the Ordinance.

Additionally, individuals disposing of shares are required to furnish information or documents within 30 days to the Commissioner holding jurisdiction over the case, as per the prescribed statement. However, the Commissioner has the authority to call for the said information or documents within a shorter period if necessary.

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The amendments also exclude shares of listed companies not traded on a registered stock exchange and not settled through NCCPL from the ambit of section 37A. In such cases, provisions of section 37 shall apply concerning the collection and payment of taxes. This change aims to address off-market transactions of shares of listed companies not traded through registered stock exchanges and not settled by NCCPL. The corresponding amendment in the Income Tax Rules, 2002, has been made through SRO 776(I)/2023 dated June 27, 2023.

Moreover, two further amendments have been made concerning capital gains on securities covered under section 37A of the Ordinance:

i. Capital gains arising from the disposal of shares of a listed company, which is conducted outside of a registered stock exchange and not settled through NCCPL, will now be taxed under section 37 of the Ordinance instead of section 37A. This amendment is aimed at eliminating unwarranted tax implications on public offerings of listed securities. However, shares disposed of through an initial public offering during the listing process will still be subject to tax under section 37A, provided that details of such disposal are furnished to NCCPL for the computation of capital gains and tax collection.

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ii. Capital gains arising from the disposal of securities acquired before July 1, 2013, were previously subject to a tax rate of 12.5%. With the Finance Act, 2023, these gains will now be taxed at a rate of zero percent. However, the 12.5% tax rate shall still apply to capital gains arising from securities acquired between July 1, 2013, and June 30, 2022. Reduced rates based on the holding period will continue to apply to securities acquired on or after July 1, 2022.

These tax amendments aim to streamline the taxation process for capital gains on securities and shares, while also encouraging compliance and transparency in the financial markets. The changes will have far-reaching implications for investors, companies, and the overall economy.