Karachi: The IMF prescription to round up all exempted money generating sectors into the tax net is believed to be inspired more by the need to know the source of funds, than the amount of income generated.

The international lenders are eyeing the real estate and the stocks. Builders and property dealers yawn at the prospect of imposition of capital gains tax (on the profit earned on sale). The reason being that price of property can and is easily manipulated. The exchange of property in many cases may be ten times the price scribbled on the transfer documents.

But investors in stocks see the imposition of CGT on share business as a clear disincentive, for there is no way to hide the price at which sale, purchase of securities take place.

It is for that reason that every year, just around the time of budget, the stock market begins clamouring for carry forward of CGT exemptions. The Government has been keeping investors in equities on the tenterhooks, by avoiding to declare exemptions for longer periods than a year or two. Given the capital losses suffered by equity investors in the year 2008, which has seen share prices drop by almost 70 per cent since the beginning of the year, extending the palm before investors for CGT this year could be a risk to a limb, but before and beyond that, is the levy of CGT a grand idea?

Muzammil Aslam, chief economist at KASB group says: “The IMF prescription is at times not based on local knowledge”. He contends that imposition of CGT would result in marginal tax benefits, which would entail at high costs. Given the steep fall in KSE market capitalisation this year, from US$75billion to a third at US$25 billion and exceptionally low volumes due to the lingering crisis, economists calculate that if the State were to impose CGT, it extract just about Rs 12 to 15 billion in CGT, which would be a drop in the ocean of tax revenue target of Rs 1.25 trillion.

No one denies the benefit of documentation and there could scarcely be an argument on the belief that income derived from whatever source ought to be taxed. And that includes tax on agriculture. But some of the strong opponents of the CGT on stocks asks to face the reality. One of them pointed out that the country was in dire need of infrastructure and industralisation.

The country being capital-deficient, “Where would the money come from?” he asks and folds two fingers one by one with the other hand: “Banks and the stock market”.

The once-an-industrialist said that he who could secure loan from banks at reasonable interest rates, would be the luckiest of entrepreneurs. And considering that the banking sector is drowned in its own sorrows of growing non-performing loans (NPLs), the other avenue is to raise capital through the Initial Public Offerings (IPOs) in the stock market.

Many of the emerging markets, such as Singapore, Egypt, Philippines; Indonesia and others do not impose taxes on income from sale of securities, said one stock broker. India levies CGT on shares which are sold within a year, presumably to discourage speculation.

There was a proposal to follow that model with the grading of tax rates in terms of period of holdings. But economist Muzammil contends that Pakistani market is much too small “The shoes should be made to fit the size”, he says