Capital Gains Presentation PDF

Capital Gains Syed Hasan Baqar Naqvi, ACA Senior Manager Tax, A. F. Ferguson & Co.  Topics Sections of ITO 2001 Capital gains S. 37 Capital gain on disposal of securities S. 37A Course...

Capital Gains Syed Hasan Baqar Naqvi, ACA Senior Manager Tax, A. F. Ferguson & Co.  Topics Sections of ITO 2001 Capital gains S. 37 Capital gain on disposal of securities S. 37A Course Deduction of losses in computing the amount chargeable under the head “Capital Gains” S. 38 Outlook Carry forward of capital losses S. 59 Non recognition rule S. 79 Advance Tax on sale or transfer of immovable S. 236C Property Advance tax on purchase or transfer of S. 236K immovable property  A gain arising on the disposal of a capital asset by a person in a tax year, other than a gain that is exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Capital Gains”. CAPITAL Three ingredients: GAIN [S. - Capital asset 37(1)] - Disposal - Gain Once above three are present, tax will be chargeable under the head ‘Capital Gains’.  Property of any kind held by a person, whether or not connected with a business, including following specified assets:  painting, sculpture, drawing or other work of art;  jewellery;  a rare manuscript, folio or book;  a postage stamp or first day cover; CAPITAL  a coin or medallion; or ASSET [S.  an antique. 37(5), 38(5)] But does not include:  any stock-in-trade, consumable stores or raw materials held for the purpose of business;  any property with respect to which the person is entitled to a depreciation or amortisation; or  any movable property [other than specified assets] held for personal use by the person or dependent of person.  (1) A person who holds an asset shall be treated as having made a disposal of the asset at the time the person parts with the ownership of the asset, including when the asset is — (a) sold, exchanged, transferred or distributed; or (b) cancelled, redeemed, relinquished, destroyed, lost, expired or surrendered. Disposal (2) The transmission of an asset by succession or under a will shall be treated as a disposal of the asset by the deceased at the time asset [S.75] is transmitted. (3) The application of a business asset to personal use shall be treated as a disposal of the asset by the owner of the asset at the time the asset is so applied. (3A) Where a business asset is discarded or ceases to be used in business, it shall be treated to have been disposed of.  The gain arising on the disposal of a capital asset by a person shall be computed in accordance with the following formula, namely:– A–B where — Gain A is the consideration received by the person on disposal of the asset; and [S.37(2)] B is the cost of the asset. Section 76 establish the cost of an asset for the purpose of this Ordinance. Section 77 establish the consideration received on disposal of an asset. Cost [S. 76] Considerati on [S.77]  Where capital asset is transferred in following cases, no capital gain or loss shall arise, if the recipient is a Pakistan resident in the relevant tax year: Transfer of assets between spouses under an agreement to live apart Under a gift from a relative, bequest or will By succession, inheritance or devolution NON- A distribution of assets on dissolution of an AOP or on liquidation of a company RECOGNITIO N RULES [S. The person acquiring the asset in above cases shall be treated as — 79] (a) acquiring an asset of the same character as the person disposing of the asset; and (b) acquiring the asset for a cost equal to the cost of the asset for the person disposing of the asset at the time of the disposal. Thus, the recipient of capital asset in above cases shall record such capital asset in their wealth statement at cost in the hands of transferor. Broad The Ordinance has bifurcated capital assets into three Categorizati broad categories for capital gain tax computation: on of  Immoveable Property [S.37(1A)];  Other Capital Assets [S.37(1)]; and Capital  Securities [S.37A]. Assets  Capital gain on disposal of immoveable property is taxable as a separate block of income. Value [sec 37(2)] Gain on disposal of immovable property is computed as follow: 𝐺𝑎𝑖𝑛 = 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑 − (𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛 + 𝐼𝑛𝑐𝑖𝑑𝑒𝑛𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠) IMMOVEABLE PROPERTY Consideration Received [S.68(5) & (6)] Consideration received for the calculation of capital gain and withholding tax purposes shall be higher of: Actual sales proceeds; Fair Market Value notified by FBR; and Value fixed by the District Officer (Revenue) or provincial or any other authorized authority for the purpose of stamp duty. TAXABILITY OF IMMOVEABLE PROPERTY [Division VIII, Part I, First Sch.]  Clause (9A) of Part III of Second Schedule The amount of tax payable on income chargeable under the head, “Capital Gains” on disposal of immovable property shall be reduced by 50% on the RELAXATIONS first sale of immovable property acquired or allotted to ex-servicemen and serving acquired or allotted to ex- ON TAXATION servicemen and serving personal of Armed Forces or ex OF employees or serving personnel of Federal and Provincial Governments, being original allottees of the IMMOVBLE immovable property, duly certified by the allotment PROPERTY authority Provided that for capital gains arising after completion of three years from the date of acquisition of immovable property the amount of tax payable shall be reduced by 75%.]  Gain or loss on disposal of immovable property in the following cases shall not fall within the ambit of capital gain: A building used for business purpose is a depreciable asset and as per section 22(8) of the Ordinance gain on disposal of a depreciable asset is taxable under the head income from business and therefore separate tax rates for gain on disposal of immovable property under the head capital gain are not applicable in this case EXEMPTION Immovable properties sold by builders and land developers etc. whose income is taxable under the head income from business S Capital gain is exempt in case of first sale being an original allottee by dependent of: [clause 114B, Part I, Second Schedule] − a shaheed belonging to Pakistan Armed forces; and − a person who dies while in the service of Pakistan Armed Forces or Federal or Provincial Governments. No advance tax shall be collected from the seller in the above cases.  Immovable property having fair market value (notified value) of more than Rs. 5 million, being higher of FBR value or Provincial value, is required to be purchased through banking channel. In case of non compliance, OTHER cost of acquisition shall be treated as zero for computation of any gain on sale of such asset [s. 75A] CONDITION S If a person purchases immovable property having notified value of more than Rs.5 million through cash or bearer cheque then he shall pay penalty at the rate of 5% of the notified value [serial 21 of S. 182(1)]  Other Capital Assets comprise of capital assets other than securities and immovable property. This includes: - specified personal assets - unlisted shares - listed shares disposed-off otherwise than through registered stock exchange and which are not settled through NCCPL [S.37A(1)]. CAPITAL ASSETS (OTHER THAN Value [sec 37(2)] SECURITIES AND Gain on disposal of asset is computed as follow: IMMOVABLE 𝐺𝑎𝑖𝑛 = 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑 − (𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛 + 𝐼𝑛𝑐𝑖𝑑𝑒𝑛𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠) PROPERTY) Consideration Received Consideration received for the calculation of capital gain and withholding tax purposes shall be higher of: Actual sales proceeds; Fair Market Value  Taxability Taxable capital gain on disposal of Other Capital Assets CAPITAL will be charged to income tax at normal income tax ASSETS (OTHER rates. THAN SECURITIES Other Conditions [sec 75] AND Other Capital Assets having fair market value of more IMMOVABLE than Rs.1 million are required to be purchased through PROPERTY) banking channel. In case of non-compliance, cost of acquisition shall be treated as zero for computation of any gain on sale of such asset.  On Sales of Listed Shares in certain cases [sec 37(6) to (10)] The person acquiring a capital asset, being shares of a company, shall deduct advance adjustable tax from the gross amount paid as consideration for the shares at INCOME TAX the rate of 10% of the fair market value of the shares WITHHOLDIN which shall be paid within 15 days of payment. G The value of shares shall be the fair market value without reduction of liabilities. The Commissioner may, on application made by the person acquiring of the shares, allow to make the payment, without deduction of tax or deduction of tax at a reduced rate.  On Sales of Immovable Property [sec 236C] Recording authorities of immovable property shall collect advance tax at the rate of 3% of the gross consideration from the transferor, which will be adjustable from the tax liability of the transferor. In INCOME TAX case a person is not appearing in ATL the rate shall be 10%. WITHHOLDIN However, the said advance tax shall be minimum tax G liability where immovable property is acquired and S. 236C disposed-off within the same tax year. The said advance tax shall be final tax for non-resident individuals who had acquired the said immovable property through a Foreign Currency Value Account or NRP Rupee Value Account and no capital gain tax will be applicable.  On Purchase of Immovable Property [sec 236K] Recording authorities of immovable property shall collect advance tax at the rate of 3% of the gross consideration from the purchaser/transferee, which will be adjustable from the tax liability of the purchaser/transferee. In case a person is not appearing in ATL then rate shall be as follows:  Where the fair market value does not exceed Rs. 50 million – 12% INCOME TAX  Where the fair market value exceeds Rs. 50 million but does not exceed Rs. 100 million – 16% WITHHOLDIN  Where the fair market value exceeds Rs. 100 million – 20% G If payment is being made in instalments before transfer/allotment then the S. 236K person responsible for collecting such instalments shall collect the advance tax. The said advance tax shall be final tax for non-resident individuals who had acquired the said immovable property through a Foreign Currency Value Account or NRP Rupee Value Account. This advance tax shall not be collected in case of any government scheme for expatriate Pakistanis where the payment is made in foreign exchange remitted from outside Pakistan through normal banking channel.  INCREASED RATE FOR LATE-FILERS A new category of late filers has been introduced for persons who are appearing in ATL but have not filed returns for last three tax years by the due dates or by the extended due dates. This concept is, however, only applicable for advance tax collection in relation to transactions in immovable properties. LATE FILERS 236C: (new concept introduced in FA 2024) 236K:  The capital gain arising from disposal of securities, other than a gain that is exempt from tax under this Ordinance, shall be chargeable to tax at the rates specified in Division VII of Part I of the First Schedule. This section shall not apply to a banking company and an insurance company. This section shall not apply to the disposal of shares – (i) of a listed company made otherwise than through registered stock exchange and Capital gain which are not settled through NCCPL; (ii) through initial public offer during listing process except where the detail of such on disposal disposal is furnished to NCCPL for computation of capital gains and tax thereon under this section, of securities and the provisions of section 37 shall apply on such disposal of shares of a listed company or disposal of shares through initial public offer, accordingly. [S.37A] This provision has stands clarified by way of an Explanation to Rule 19I(3) of the Income Tax Rules, 2002 (inserted vide SRO 776(I)/2023 dated June 27, 2023) as quoted below: “Explanation. - It is clarified that the provisions of section 37A shall remain applicable on transactions of shares of listed companies as recorded in the system of NCCPL and reported in accordance with Eighth Schedule of the Income Tax Ordinance 2001.” Therefore, in order to apply taxation as per section 37A, it is mandatory that the transaction for sale of shares is reported and recorded in the system of NCCPL. If the above condition is not met, the gain is to be treated as sale of shares of private limited company, taxable under the provisions of section 37 of the Ordinance at the normal applicable rates.  Share of a public company (only if such company is a public company at the time of disposal), voucher of Pakistan Telecommunication Corporation, Modaraba Certificate, an instrument of redeemable capital, debt securities, unit of exchange traded fund and derivative Securities products. [S.37A(3)] However, share of listed company disposed-off otherwise than through registered stock exchange and which are not settled through NCCPL, shall not be considered as securities for the purpose of capital gain computation under section 37A. Public company [S.2(47)  Redeemable Capital includes Sukuk and other forms of finances obtained on the basis of participation term certificate (PTC), musharika certificate, term finance certificate (TFC) or any other security or obligation not based on interest, representing an instrument or a Redeemable certificate of specified denomination, called the face Capital [S. value or nominal value, evidencing investment of the holder in the capital of the company other than share 2(55) of capital, on terms and conditions of the agreement for Companies Act, the issue of such instrument or certificate or such other 2017] certificate or instrument as the concerned Minister-in- Charge of the Federal Government may specify for the purpose. In order words, redeemable capital is any interest or profit based certificates evidencing investment of the holder issued by a company other than shares. Debt Securities  Gain on disposal of securities is computed as follow: 𝐺𝑎𝑖𝑛 = 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑 − (𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛 + 𝐼𝑛𝑐𝑖𝑑𝑒𝑛𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠) Consideration Received is higher of: -Actual amount received; or Value - Fair Market Value [S. 37A(1A)] Cost of Acquisition will be taken on FIFO basis except for the case where sales and purchase of shares occur on same day. Incidental Expense in case of market-based transaction of any security, a notional expense at the rate of 0.5% of sale proceed and 0.5% of cost of security shall be taken in lieu of brokerage, commission, transaction fee, levy, Laga or any other similar incidental expense [rule 13N(8)]. However, this notional deduction is not applicable in case of: units of open-ended mutual funds; and future contracts entered into by members of PMEX.  Capital gains under section 37A are treated as separate block of income and chargeable to tax at lower rates based on the holding period of such shares specified in specified in Division VII of Part I of the First Schedule to the Ordinance. All gain on disposal of securities acquired on or before June 30, 2013 are taxed at the rate of 0% and securities acquired on or before June 30, 2022 are taxed at the rate of 12.5%. For a gain on disposal of securities acquired after June 30, 2022 following slabs will apply: Taxability  In case of Company, debt securities are taxed at normal rate Mutual fund, collective investment schemes and Real Estate Investment Trust (REIT) shall deduct tax at the following rates on the disposal of their units within 6 years: Individual/AOP – 10% [15% wef 1 July 2024] Taxability Company 10% for stock funds [15% wef 1 July 2024] (cont’d) 25% for other funds However, in case of stock fund if dividend receipts of the fund are less than capital gain then rate would be 12.5% [15% wef 1 July 2024]. “Stock Fund” means a collective investment scheme or a mutual fund where the investible funds are invested by way of equity shares in companies, to the extent of more than 70% of the investment [sec 2(61A)]  Special provision relating to capital gain tax Capital gains on disposal of listed securities and tax thereon including super tax under section 4C, subject to section 37A, shall be computed, determined, collected and deposited in accordance with the rules laid down in the Eighth Schedule. The above shall not apply to the following persons or class of persons, namely:- S.100B (a) a mutual fund; (b) banking company, a non-banking finance company and an insurance company subject to tax under the Fourth Schedule; (c) a modaraba; (d) a company, in respect of debt securities only; and (e) any other person or class of persons notified by the Board.   Tax shall be collected and deposited on behalf of taxpayers by NCCPL  NCCPL shall issue an annual certificate to the taxpayer on the prescribed form in respect of capital gains subject to tax under this Schedule for a financial year  Every taxpayer shall file the certificate referred to in sub-rule (4) along with the return of income and such Eight certificate shall be conclusive evidence in respect of the income under this Schedule. Schedule  If a person intends not to opt for determination and payment of tax as laid down in Eight Schedule, he shall file an irrevocable option to NCCPL after obtaining prior approval of the Commissioner in the manner prescribed. Relevant rules are Rule 13A to 13P of Income Tax Rules, 2002.  Prior to July 1, 2014, securities held for a period of more than one year were not chargeable to tax due to the following proviso to sub section (1) of section 37A which reads as follows: “Provided that this section shall not apply if the securities are held for a period of more than one year.” This proviso granting exemption was removed through Finance Act, 2014 (applicable from July 1, 2014). Case Law In respect of above proviso, a controversy arose between the taxpayers and 2017 PTD the taxation authorities regarding the taxation of those investments in securities, the holding period whereof had already exceeded the exemption period of one year as on June 30, 2014. Such controversy was put to rest by 1069 the Honourable Sindh High Court in case of Anwar Yahya v. Pakistan (reported as 2017 PTD 1069). The Court in this case analyzed the claim whether vested rights existed on the date of acquisition when the Ordinance did not impose capital gains tax on shares/securities held for a period of 1 year or more. It was inter alia held that: “…in respect of shares held for more than a year, as on and up to 30.06.2014, the taxpayer acquired a vested right by reason of the proviso, such that section 37A did not apply at all to any capital gains on the disposal of such shares, regardless of the date of disposal.”  Loss on disposal of securities in a tax year shall be set off only against the gain from any other securities chargeable to tax. Unadjusted loss can only be carried forward to succeeding 3 tax years only against gain on disposal of securities [proviso of sec 37A(5)] Capital loss on disposal of Immovable Property and Other Capital Assets except for specified personal assets in a tax year shall be set off against other capital gain in the year it arises. CAPITAL LOSS Unadjusted loss can only be carried forward to succeeding 6 tax years only against gain on disposal of Immovable Property and Other Capital Assets except for specified personal assets [sec 59] Capital loss in respect of specified personal assets is not recognised [sec 38(5)] However, capital losses are not allowed to be adjusted where a gain on the disposal of such asset would not be chargeable to tax [sec 38(5)] Thank You