KARACHI: The government has imposed Capital Gains Tax (CGT) on debt instruments like Pakistan Investment Bonds, Treasury Bills, Foreign Currency Bonds and Sukuk in the proposed Finance Bill 2014-15.

Experts and researchers said while the CGT on Securities (stocks) was clear and widely discussed, the imposition of CGT on the other component of the capital market — the debt instruments — was not as apparent.

They noted that the finance bill didn’t explain what would be the process to put the tax on the debt instruments or on what stage the tax would be applicable.

Bankers, however, affirmed that the CGT would be imposed on trading of these instruments like it had been applicable on share market. The total investment in PIBs this year rose to Rs1.7 trillion; most of the investments were made by the banks.

“Our initial understanding suggests that income derived by trading in bond securities will be subject to the CGT after the approval of the finance bill,” said Nauman Khan of Shajar Capital.

Topline Securities CEO Mohammad Sohail also confirmed that as per the finance bill the debt securities were liable to the CGT.

The government has proposed to enhance the holding period to one and two years from previously six-month and one-year, respectively, said Khan. “The rate has been proposed to be enhanced to 12.5 per cent from 10pc,” he added.

The government for the first time has floated the treasury bills on the stock market to secure much bigger size of loan compared to banks alone.

The definition of the term securities has been extended to include corporate debt securities such as Term Finance Certificates (TFCs), Sukuk Certificates, Registered Bonds, Commercial Papers and Participation Term Certificates (PTCs) and all kinds of debt instruments issued by any Pakistani or foreign company and corporation registered in Pakistan; and Government Debt Securities such as Treasury Bills (T-bills), Federal Investment Bonds (FIBs), Pakistan Investment Bonds (PIBs), Foreign Currency Bonds, Government Papers, Municipal Bonds, Infrastructure Bonds and all kinds of debt instruments issued by Federal Government, Provincial Governments, Local Authorities and other statutory bodies.

Bankers said further explanation was required to make it clear whether the CGT would be imposed on banks’ investment in these papers or not since the banks were the largest investors in government papers including all kinds of bonds.

Banks have massively invested in PIBs with minimum return of over 12 per cent (three-year PIBs). If the CGT imposed on income from the PIBs the banks may not be interested in future to invest in PIBs or any other government papers.

Published in Dawn, June 6th, 2014