KARACHI, June 14: The government's proposal to levy Capital Value Tax (CVT) on purchase of shares was greeted, on Monday, with strong condemnation from almost every stock broker, trader and his agent at the Karachi Stock Exchange.

The expression of anger, though varied from mild to mighty.

Sanity prevailed at some of the brokerage houses, where everyone stayed glued to their trading terminals watching helplessly as the Index plunged by 167 points during the day.

Major volume leaders and large cap stocks opened at the lower circuit breakers. Day traders, backed by some smaller brokerage houses, went berserk and the heat on a hot day was intensified as traders and agents starting from slogan raising, went about ransacking the bourses property.

Moin M.Fudda, managing director, the KSE, was perhaps the most hated person at the bourse on Monday, for he stoically opposed the general mood of keeping the bourse shut.

His reasoning was that Pakistani capital markets had graduated to a level of international markets and its closure on such issues would be a big setback. Fudda along with Arif Habib, chairman KSE and the bigwigs of the Lahore and Islamabad Stock Exchanges, had a joint meeting with the Finance Minister till 2 a.m that morning. Present at the meeting was also the chairman, the CBR and chairman the SECP.

"We have received assurances from the Finance Minister that the issue of CVT would be resolved after a due process and that the government was prepared to consider viable alternate proposals in the interest of capital market," the chairman, KSE, Arif Habib told Dawn while flying back to Karachi, Monday afternoon.

He said he could pin firm faith in the Finance Minister's assurance that the government did not mean to disturb the existing buoyancy of the capital markets. A committee of representatives from CBR and the stock exchanges had put their heads together to identify alternative sources of revenue generation from the stock market.

Suggestions included raising withholding tax on brokers' commission from 5 to 10 per cent or reducing CVT from 0.1 to 0.01 per cent. On the ground at the stock exchange, MD KSE Moin Fudda tried to assuage investors' fears by employing various management techniques.

He even addressed brokers and traders through the Public Address System (PAS) asking them to keep calm while the issue was being resolved. He reminded brokers and traders to be thankful for the big money they had been making and not to damage the image of the country by resorting to violent means.

He also confirmed that the FM had heard the stock exchange's grievances over the CVT and assured of a review. Market watchers believed that, in the third year of its rally, the stock exchanges had attracted CBR's attention which was looking to collect Rs1 to Rs1.5 billion from the market.

Apart from tax on dividends, the stocks enjoyed quite a degree of immunity from taxes. Calculations of how much the CBR had in mind to collect under CVT varied from analyst to analyst.But, if the aim was to extract money from rich stock investors, the method adopted was sheer madness. As much as 90 per cent of day's trade at the stock exchange was speculative driven and CVT would double the transaction cost.

In turn that would hit the trading volumes. On Monday the volume dropped 36 per cent, to 196 million shares, from the daily average turnover of 305 million shares.

A trader lamented that on Rs58 per share average price of a stock, the CVT would work out to 5.8 paisa, while the average commission is 5 paisa. Would the trader pay 0.8 paisa from his own pocket? Also, all purchases do not result in gains, but the investor would have to pay CVT even when he makes a capital loss, he complained.

But unless the issue is resolved quickly, the stock prices would continue to slip, as they are likely to open at their lower circuit breakers as happened on Monday. If that happens, small investors could end up as big losers.

Many other questions also remain unanswered: Would CVT apply also to the COT (badla) transactions and who would pay this tax anyway: the trader or his client; each was likely to shift the burden on the other.

Our Staff Reporter adds from Lahore: Finance Minister Shaukat Aziz is said to have indicated to the bourses that the government may withdraw the proposed 0.1 per cent capital value tax (CVT) to be levied on stock trading from the start of the next financial year.

The indication was given during a meeting of the finance minister with chairmen and officials of the three stock exchanges in Islamabad on Sunday evening, according to Lahore Stock Exchange chairman Asim Zafar.

Mr Zafar believed that the government replaced the proposed CVT with a 100 per cent increase in withholding tax on share business. At present the government charges a five per cent withholding tax, which is likely to be doubled to 10 per cent in case CVT is withdrawn.

While the stock exchanges kept negotiating with the finance minister on the impact of the proposed CVT, scores of investors held a demonstration to protest against its levy in the budget.

The protesters blocked Aiwan-i-Iqbal Road for half-an-hour by burning tyres. They also set on fire the effigy of Mr Aziz. The demonstration was staged after the LSE management rejected their request to keep the market closed till the withdrawal of CVT. Mr Zafar said trading would not be suspended in any case as he was optimistic that the matter would be resolved soon.