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1- DHL: NEW PRODUCT
2- PTCL: A PERFORMANCE REVIEW
3- MOTOR VEHICLE TAX
4- CAPITAL VALUE TAX MUDDLE

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CAPITAL VALUE TAX MUDDLE

 

The speculators have enjoyed the party for more than three decades. It is the time to contribute their share in the national exchequer

 

By SHABBIR H. KAZMI 
June 21 - 27, 2004
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Monday the June 14, 2004 will be remembered as a black day in the history of Karachi Stock Exchange (KSE). The investors demonstrating against imposition Capital Value Tax (CVT) went violent and attempted to damage the KSE property. Normally the ethnic group having the largest stake at the KSE does not believe in violence. It is understood that the 'sponsored' campaigner initiated the nuisance based on the news about investors' aggressive flaunt at Lahore. Presence of video cameras of reporting teams provided the extra fuel. Whatever happened on the day can only be termed a 'well staged drama' by the groups having the vested interest.

The demonstration by brokers' sponsored groups against the CVT is beyond comprehension. The proposed tax has to be paid by the investors and not by the brokers. This tax has been imposed in lieu of capital gains tax. Capital gains made at the stock exchanges have remained tax exempted since 1975. It is interesting to note that brokers' fraternity is the biggest opponent of taxing capital gains and wants this exemption to continue indefinitely. But, they have been supporting the government in imposition of income tax on dividend income. Over the last 35 years the successive governments could not dare to tax capital gains but this exemption has to go one day.

It is necessary to understand the brokers' resistance or bias against imposition of capital gains tax. The brokers' stance is, "If any tax is imposed on capital gains, the market will crash". Is there any truth or relationship between capital gains and market movement? To understand this one has to look at the daily trading volume and the segments from which this volume is generated. According to market analysts nearly 90% of daily trading volume pertains to 'day trades' and only 10% is the share of 'real investors'.

The day traders are mostly the speculators. Creation of paperless securities and online trading facilities has lured the novice to indulge in day trade. According to some analysts, "With the passage of time brokers are no longer the facilitators but have emerged to be the largest investors in the equities market. Therefore, they are also the largest beneficiaries of exemption on capital gains. If such a tax is imposed it can only hurt the brokers' interest and not the investors' interest". In other words it may be said that the regulators as well as the tax collectors have been protecting the interest of speculators and not the real investors.

The regulators have either fallen pray to the rationalization offered by the big brokers or also have their own stakes. One gets this feeling after probing the market a little deeper. The regulators have been expressing their intents to broaden investors' base but the reality is that the total number of investors in public limited companies is less than 50,000. The number of investors in equities market has been so meagre only because investment is penalized and speculation is encouraged. This point is fully substantiated because income tax is being collected on dividend income but capital gains have remained tax exempted for nearly thirty years.

It is believed that at a pre-budget meeting of Finance Minister the brokers requested for continuation of this exemption but the minister made it clear that they had to contribute their share for achieving the enhanced revenue collection target. In the mean time it also became evident that the GoP can mobilize from Rs 4.8 billion to Rs 7.2 billion. As the bargaining went on the representatives of brokers also bowed down but the community at large did not approve their act. That is the reason violent demonstrations were staged.

Lately some alternative measures have been suggested by the brokers that include doubling the rate of withholding tax being paid by the brokers and imposition of one paisa/share tax at sale as well as purchase. It seems a little strange that brokers have expressed their willingness to pay the withholding tax at double the rate provided the government withdraws the CVT. It is understood that the government will withdraw the CVT because brokers have assured to help mobilize one billion rupee tax contribution from the capital market.

One cannot dispute the principal that all types of income, including capital gains, should be taxed. However, the reality is that there is no incentive for paying tax. The tax payers often become hostage of tax collectors. Therefore, no one wish to declare his/her real income. If one subtracts the expenditures incurred on the tax collection regime from the total collection the leftover even does not justify their presence.

Saying this it is necessary to reiterate that if the government continues the exemption on capital gains it would be a great disfavour to the real investors. They must bring down corporate tax and declare dividend income exempted from payment of all types of taxes. Unless an incentive is provided for investment, the speculators will continue to dictate their terms.