KARACHI, June 5: The increase in capital value tax (CVT) from 0.01 per cent to 0.02 per cent was invariably considered as an unwise proposal by stock brokers, analysts and investors. Other than that, the budget speech made by Minister of State for Finance Omar Ayub Khan on Monday was considered to be ‘neutral’ for the stock market.
The state minister caused a bit of confusion when just before the break for Maghrib prayers he announced that on resumption he would specify budgetary measures for the stock market but did not do just that. Not many people were, therefore, sure if some of the other proposals were also in the budget, such as withholding tax on transaction rising from 0.005 per cent to 0.01 per cent and increase in withholding tax on commission from five to 10 per cent. And therefore there were no immediate comments from market players on those two issues.
Aqeel Karim Dhedhi, known to be one of the three top brokers, unhappily remarked that it was unfair to ask investors to pay twice in CVT of what they already were being charged. “Even better would have been the imposition of small percentage in capital gains tax,” said Mr Dhedhi. His reason, to which other brokers and analysts subscribed, was that capital gains was imposed on the income earned, while CVT would be levied on all purchase transactions whether investors make a profit or incur a loss.
Abid Ali Habib, sitting director on the KSE board, also objected to the increase in CVT. He stated that the government had set the target of CVT revenue collection for the outgoing year at Rs4 billion. The exchange had contributed Rs6 billion to the exchequer, which was as much as 50 per cent higher than the target. Now the government has set the target for collection under CVT for 2006-07 at Rs2.9 billion.
Why a lower target when the percentage had been doubled, he was asked. Mr Habib suspected that the government might have foreseen a slowdown in the number of transactions which warranted setting a lower target.
Mohammad Sohail, director research and equity sales at Jahangir Siddiqui and Company Limited, observed that two years ago when CVT had been first imposed, there was the same fear of a decline in volume. He nonetheless said the raise was surely ‘negative’ for the market. Overall, he said, the budget, which was expansionary in nature (growth-oriented), appeared to be ‘neutral’ for the stock market.
Khalid Iqbal Siddiqui, head of research at InvestCap, also had the same to say about CVT and the impact of the budget on the stock business.
Unlike previous year, there were neither many incentives nor disincentives for the capital market. If on the one hand CVT was causing a bit of heartburn, almost all persons referred to above thought that the imposition of two per cent CVT on property and five per cent tax on rental income, could divert some of the funds from the flourishing real estate business towards the equity market.
They were then reminded that there was world of a difference between the actual transacted value of the property and the price quoted on official papers for stamp duty. And that CVT would be levied on the latter, which might amount to a pittance, some of them agreed that there was a possibility of such hanky panky, but it was not as easier to show very wide difference now as was possible five years or so ago. “And in any case, the real estate business would come under the CVT net, which in terms of competition would give the equity market a level-playing field,” said KSE director Abid Ali Habib.