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Budget 2005-06: Capital gains exemption, tax cut boon for capital market

KARACHI (June 07 2005): The government's decision to allow tax exemption to insurance sector, abolition of customs duty on imports of spare parts for textile machinery and other allied industries, cut in bank rates and reduction in levies will help in improving the sentiment in the capital market.

Former Karachi Stock Exchange (KSE) chairman Arif Habib, while commenting on the budget, said that it is investors and business-friendly and would help in boosting the earnings of the companies. The capital gains tax exemption on insurance sector is a bold step and would increase investment in this sector. Moreover, a number of measures taken by the government in the federal budget are quite encouraging which would help in achieving the targets for the new fiscal year.

He said that the textile group and other agricultural sector have received a number of incentives, which would reduce input costs, passing the benefits to the common man and would also curb inflation.

He said that the bank's tax rate was reduced, insurance sector received capital gains tax exemption to broaden debt market, and 10 percent investors was allowed to those investors buying term finance certificates (TFCs) worth up to Rs.150,000.

Arif Habib said that the government aimed to increase the number of listed companies on the KSE. The new companies are being encouraged to enlist their entities on the local bourses and one percent tax rebate is allowed, meaning they have to pay 34 percent tax instead of 35 percent.

Mohammad Sohail, head of research at Jahangir Siddiqui Capital Markets, said that the budget is a continuation of the economic policies of the government with main focus on agriculture, textile and controlling inflation. Exemptions, allowed to the agriculture sector, would reduce the input costs, thereby, reducing the end prices of the commodities.

“However, no change has been made in share turnover tax, meaning Capital Value Tax (CVT) and corporate tax of the listed companies remained unchanged at 35 percent, which is a good omen for the market,” he said.

Pakistan Commodity Traders Association Chairman Raees Ashraf Tar Mohammad said that it is a people's budget and showed that the economy since 1999 is performing well.

“The abolition of sales tax and excise duty on a number of industries, including textile sector, is a landmark decision,” he said. Another important plan of the government for the new fiscal year is to increase the tax revenue collection by Rs 100 billion without adding new taxes, which is also commendable, he said.

Raees said that the budgetary measures would improve the “livelihood” of the salaried class as the tax rate has been reduced to '3.5 percent to 30 percent' from '7.5 percent to 35 percent'. The reduction in tax rate would increase the deposits and might help in improving the purchasing power of the common man.

However, he was perturbed over the government's decision to impose 0.1 percent withholding tax on Rs 25,000 withdrawal of cash from the banks. This is unrealistic as in the past similar measures have caused resentment and the government was forced to withdraw the tax. “If the government has no other alternative, the threshold of Rs 25,000 should be raised to Rs 100,000,” he suggested.

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