December 01, 2007	Saturday	Ziqa’ad 20, 1428

KARACHI, Nov 30: There has been lot of sound and fury over banks, insurance and other companies that close their year on December 31, 2007 as they make a scramble to book capital gains before the year is out.

But does that really have to be so?

The exemption of tax on capital gains is to expire on June 30, 2008, which is why corporates that maintain financial year end at December 31, must revalue investment to capture if not all, at least in part the capital gains on their books.

In case of complacency, they could be liable to capital gains tax, if the government in its wisdom decides to bring companies under the tax net next year.

Banks and insurance companies, which depend to a great extent on dividend income in order to augment their earnings, park a sizeable portion of their cash in equity investment. Due to the phenomenal rise in stock values in recent years, the blue chip stocks in the portfolio of those institutions have brought windfall gain.

“That’s the money that my company has earned with patience and sound investment judgement”, says the chief financial officer of a private bank. And he adds: “Why should we let the taxman take away any of it?

But effectively all that the procedure involves is to lift market value of investments from the footnote to the face of the balance sheet. Some of the banks and insurance companies are opting to show the investments at revaluated amount on the books, instead of taking the sum of capital gains on their Profit & Loss account.

Abbas. K, a chartered accountant who runs his own audit firm says: “In each of the two cases, there is no levy of tax”.

Companies that plan to realise their capital gains, theoretically, sell those shares in the market followed by buying back the same number of shares. The only concern that some experts articulate is to monitor the arms-length buying and selling of those securities.

Blocks of shares change hands as “cross transactions” between two brokerage houses. In such instances, the security does not enter the market through normal trading, but is sold/bought on block between stock brokers. It is for the market management, tax and accounting experts to determine whether such block deals are fair or foul?