Apr 30 - May 6, 20

The exemption from questions on source of income under the Presidential Ordinance is well poised to ignite a spark in the stock market that has already crossed 14,000 points after a period of four years.

Zafar Moti, Director Karachi Stock Exchange, while talking to PAGE, said that the timely promulgation of the Ordinance had saved the stock market from a total crash on heightening political noise caused by Prime Minister's case in the Supreme Court as well as worsening law and order situation in Layari and other parts of Karachi, the financial hub of the country.

Actually, the political uncertainty as well as precarious law and order situation has made a serious dent to the confidence of the domestic as well as foreign investors. The foreign investors have been issued travel advisories for Pakistan.

In this backdrop the arrival of the presidential ordinance is a well timed step by the President Asif Zardari to restore confidence of the investors. He deserves appreciation for taking such a sagacious decision in the difficult situation no doubt.

It may be recalled that the stocks market had attained an unprecedented height during Musharaf's days when the KSE-100 Index had crossed 16,000 points mark. However, after the change of the government, the impact of the situation was quite visible in almost idle capital market.

The market bounced back to the current level primarily because of the bold policies by the financial regulators as well as securities and exchange commission of Pakistan (SECP).

Zafar Moti said that had the Ordinance been not promulgated a day before the eventful day of Supreme Court's decision, indubitably it could have brought down the KSE-100 index by at least 500 points just in a day.

In fact, the CGT Ordinance has provided a strength and stability to the market that it absorbed the shock smoothly and after a brief drop it gained the height in the very next pause.

Mr. Zafar said that the ordinance would encourage the retail investors in the presence of amnesty on probe into source of income.

The ground reality in our society is that majority of the people due to poor literacy rate are engaged in an informal business and have yet to come on the taxation regime. The given conditions merit that such informal economy should gradually be come into the tax net through softening procedures and change in modus operandi of the tax collecting agencies.

The Ordinance is all set to attract small investors who may give a boost to KSE-100, which is expected to make another record at 15,000 in one or one and half month of time. Such is the impact of the Ordinance, observed Zafar.

The Ordinance has also paved the way for inviting public offerings, which are yet another way of capital formation through fund raising. Zafar Moti was optimistic about the positive response of the market going forward.

Under the Ordinance, the investors who have invested prior to the introduction of this Ordinance, will not be questioned of sources of funds provided (a) statement of investments is filed along with return of income and wealth statement for 2012 and (b) the amount remains invested for a 45 days up to 30th June 2012.

Similarly, the investors who invest between introduction of this new Ordinance and June 30th 2014, will not be asked about sources of investment provided (a) statement of investments is filed along with return of income and wealth statement for relevant tax year, (b) Capital gains tax has been discharged and (c) the amount remains invested for 120 days


In what could arguably be termed as the most awaited development of the year, the president has promulgated the Capital Gains Tax Ordinance, 2012, which aims at reviving confidence at the KSE after CGT related jitters (cumbersome paperwork and fear of being hassled by tax authorities over source of income) had sidelined retail investors since its imposition in 2010.

This Ordinance is primarily aimed at retail investors and not applicable to mutual funds, banks, non-banking finance companies (NBFCs), insurance companies, Modarabas, and foreign institutional investors. The Ordinance is valid for 120 days and will be presented in the budget for parliament approval in end May.

The rate of CGT has been frozen at 10 per cent (for less than six months holding and eight per cent for holding between six and 12 months) up to 2014.

In addition, National Clearing Company of Pakistan (NCCPL) has been designated as computation and collection agent.

NCCPL certificate and return of income will be treated as conclusive evidence in respect of this income.

KSE is likely to elicit an initial positive reaction but requirements of income returns and wealth statements along with questions over practical implementation could cap the excitement. Meanwhile, levy of 0.01 per cent CVT on purchase of securities could also act as minor irritant. In addition, relief on income source could invite undue attention from other stakeholders given quasi-amnesty nature of the scheme.

Meanwhile, the approval recommendations by the board of directors to transform the benchmark KSE-100 index to a free-float based methodology as compared to existing market cap basis is yet another major development, which may bring it in line with international standards and reduce the impact of illiquid stocks.