Brokers agree to increase withholding tax to 10 percent

KARACHI (June 16 2004): The stock brokers have agreed to taxing brokerage income, carryover transactions and the difference in the bill of trading following government's decision to remove capital value tax (CVT), according to sources close to Karachi Stock Exchange.

Sources said that a marathon meeting of Karachi Stock Exchange (KSE) members was held, allowing the chairman to address the controversial issue of 0.1 percent capital value tax (CVT).

The Board of Directors also met on Tuesday to finalise the modalities to ease the situation arising after the imposition of CVT in budget due to which on Monday share prices plunged and the index fell by 165 points or as much as 3 percent.

The stockbrokers on Tuesday agreed to increase the withholding tax to 10 percent from 5 percent, taxing brokerage income generated from carryover transactions and taxing the difference in the bill of trading. However, the stockbrokers want that the Central Board of Revenue, the Securities and Exchange Commission and the management of the KSE to first design modalities and mechanism and then introduce the new taxing system on brokerage income.

There is likelihood that the chairmen of Karachi, Lahore and Islamabad stock exchange, Securities and Exchange Commission and Central Board of Revenue would meet in a day or two either in Karachi or Islamabad to resolve the CVT issue.

According to an analyst, taxing carryover transactions would be a temporary tax as the COT would eventually see its logical end with the launch of margin financing. Similarly, taxing brokers' commission would be unfair owing to the meagre sum this community is making with the recent rise in competition.

The taxation on the difference in the bill of trading would be a capital gain tax, which is still exempted under the government's policy announcement.

Analysts still believed that the government should consider removing this tax rather than insisting on its continuation. Given the small amount involved in the tax, one can understand that the government wants to document this segment.

Any such exercise in the market would have a significant negative impact on the development of the capital markets. The Government of Pakistan was the largest beneficiary of the rising stock market as it has been using the positive sentiment of the stock exchange to divest its holdings in the recent past. The sale of OGDC, SSGC and PIAC shares through stock market received overwhelming response and subscription amount against the offer reached as much as 11 times higher.

The government intends to sell shares in Kot Addu Power Plant, Pakistan Petroleum Ltd and United Bank of Pakistan and it might receive a setback if it fails to remove the CVT, said a trader.

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