KARACHI, June 22: Many brokers are still sore about the Capital Value Tax (CVT), which though reduced by 90 per cent to just 0.01 per cent is still seen as a tool in the hands of the government to extract more, whenever it chooses to do so.

But some stock strategists point out the flip side of CVT as well. They observed that all the measures taken by the government were aimed at bringing stability to the market and investors would be better off by increasing the average holding period of their investments.

They stated that scoring gains as the best performing emerging market was definitely impressive, but being one of the most traded markets in the world was something which generally sent negative signals to potential investors who feared higher price volatility due to that reason.

"In the long term, this levy will influence investors to extend their holding periods beyond a few minutes to a few days and will inject stability in prices as well", says Arshad Arif, head of research at KASB Securities.

Never mind the insignificant 0.01 per cent, the overall levy was argued to be substantially higher than that. The 0.005 per cent charge on purchases and sale of shares was another form of CVT which the government was expecting the brokerage community to pay. The other levy, though a temporary tax in nature, was said to be justified given the nature of money the badla providers were making.

Arshad Arif felt that the transaction cost increase would be manifold: one, the CVT was a direct investors' tax and the purchaser of the shares would have to bear that extra cost irrespective of their investment horizon; two, the extra levy of 0.005 per cent on brokers was unlikely to be absorbed by the broker himself as the current commission rates were already at their bare minimum and the additional levy would further squeeze brokers who would eventually raise their commission rates by an equal amount.

Both those factors were expected to adversely affect margins of day traders and would force them to either lower their trading activity or seek higher margins to make their daily earnings.

In either scenario, investors were feared to be worst off both in terms of reward and the risk involved in that business. As far as the 10 per cent withholding tax on COT was concerned, analyst thought that it would marginally disturb the liquidity pool available for COT.

And if that pool stayed at current levels, the participating players would definitely try to raise rates to match their returns at the previous levels. In other words, higher badla rates were also likely to affect the market volume and the quantity of shares in COT.

Analyst opined that KSE would be seen as less attractive compared to the pre budget days owing to rising transactional costs.