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.