KARACHI: The government seeks to exempt capital gains tax (CGT) for the tax years 2015 and 2016 on the disposal of securities whose holding period is more than four years.

A new slab has been introduced in the budget 2015-16, proposing CGT at 7.5 per cent for holdings between two and four years. The CGT on holdings for period of less than four years seems to have remained the same as proposed in the budget.

A rise of 2.5 percentage points to 15pc from 12.5pc on holdings for less than one year, and to 12.5pc from 10pc on holdings between one and two years was introduced in the budget.

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Several market players thought that the slab for holdings of over four years had been shelved by the government for the time being after an uproar by the institutions. “The slab would have generally impacted long-term holders of equity, which are either the institutions or the foreign investors,” confided a senior analysts, adding that they may have used their clout to seek waiver through powerful brokers.

Another significant change for the capital market that lacked clarity was the mode of levy of compulsory dividend payout. The budget had proposed that in case of a public company other than a scheduled bank or a Modaraba, which does not distribute cash dividends within six months of the end of the tax year or distributes dividends to such an extent that its reserves, after such distribution, are in excess of full amount of its paid-up capital, the excess amount would be taxed at the rate of 10pc.

The proposed amendment suggests that in the context of tax on undistributed reserves, “companies with huge reserves to be given the option to distribute at least 40pc of profits or 50pc of the paid-up capital”.

According to the KSE annual report for 2014, out of 562 listed companies as many 114 did not share the corporate profits with the shareholders despite earning profit.

Although many analysts believe that the regulation would either raise cash payouts of such companies or speed up expansion plans, others still see it as infringement on the right of the company boards.

Whether the corporates earning profit should be forced to pay dividend or the decision between payout and retention should be left to the company boards has remained a subject of intense debate.

The reaction of the market and the corporate sponsors has yet to be seen on the amendment on compulsory dividend payout.

Another taxation measure unlikely to find favour with the investors is the increase in withholding tax rate on dividend by 2.5pps to 12.5pc. Yet, the finance minister has remained adamant on seeking that pound of flesh.

Published in Dawn, June 20th, 2015

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