INCOME FROM CAPITAL GAINS - INCOME TAX ORDINANCE, 2001

CAPITAL GAINS

Profit and gain arising from the 'disposal ' of 'capital assets ' is taxable under the head 'Capital Gains' [37(1)]

The term 'Capital Asset' has been defined as follows:

CAPITAL ASSET [2(10) & 37(5))

Capital asset means property of any kind held by a person excluding the following assets:

1. Any stock-in-trade, consumable stores or raw materials;

2. Any depreciable assets;

3. Any intangible asset on which amortization is allowed u/s 24; and

4. Any movable property held for personal use by the person or his family member dependent upon him. 

However. the following assets shall be treated as capital assets :

i) A painting , sculpture, drawing or other work of art;

ii) Jewelry;

iii) A rare manuscript, folio or book;

iv) A postage stamp or first day cover;

v) A coin or medallion : or

vi) An antique.

It may be noted that the property may or may not be held for the purpose of business.

Examples of Capital Assets

1. Modaraba Certificates .

2. Participation Term Certificates.

3. Term Finance Certificates.

4. Musharika Certificates.

5. Shares of companies.

6. PTC vouchers issued by Government of Pakistan.

7. Leasehold rights.

8. Partner' s share in an AOP .

9. Immovable property.

COMPUTATION OF CAPITAL GAIN [37(2) , (3) & (4)]

In order to charge an income under this head there should be a gain on 'disposal' of the capital assets, which is computed as below: 

Consideration received on disposal of asset                                              XXX

Less: Cost of the asset                                                                                XXX

Gain/ (Loss) on disposal of asset                                                               XXX

Notes :

1. As per section 76(2) of the Income Tax Ordinance, 2001 the incidental expenditure incurred on disposal of asset also forms a part of the cost of the asset. Thus any expenses on disposal shall also be deducted in order to compute the gain or loss.

2. While determining the cost of capital asset the following amounts shall not be included: [38(4)]

i) Any expenditure that is or may be deducted under any other head of income; and

ii) Any expenditure that is rendered inadmissible under section 21 of the Income Tax Ordinance, 2001

TAX ON CAPITAL GAINS [Clause (5B) of Part-II of Second Schedule]

Tax @ 10% of the capital gain shall be charged if the gain is from the sale of shares or assets by a private limited company to Private Equity and Venture Capital Fund .

FAIR MARKET VALUE AS COST OF CAPITAL ASSET [37(4A)]

The fair market value on the date on which an asset is transferred or acquired by a person shall be treated as its cost if the capital asset becomes the property of a person under any of the following cases:

1. Gift, 

2. Bequest,

3. Will, 

4. Succession,

5. Inheritance, 

6. Devolution,

7. Distribution of asset on dissolution of an AOP, or

8. Distribution of asset on liquidation of a company.

GAIN ON DISPOSAL AFTER ONE YEAR [37(3)]

Where a capital asset (which is taxable under Normal Tax Regime) is disposed of after one year of its acquisition then the gain for income tax purposes shall be taken as 3/4th (i .e., 75%) of the actual gain on disposal. Remaining 1/4th (i .e.. 25%) of the gain shall be treated as exempt.

Exception: The above treatment shall not be applicable to the following Capital Assets:

1. Shares of public companies; 

2. Vouchers of Pakistan Telecommunication Corporation;

3. Modaraba certificates; and

4. Any instrument of redeemable capital.

Section 37A of the Income Tax Ordinance, 2001 provides a separate tax treatment for above-referred assets. 

The relevant provisions are discussed below.

CAPITAL GAIN ON IMMOVABLE PROPERTY [37(1A) & Division-VIII , Part-I of First Schedule]

From the tax year 2013 immovable property has been rendered as 'capital asset'. Gain on disposal of immovable property is taxable as a Separate Block of Income.

A) Property Allotted to Dependents of Shaheed, etc. [236C (4)]

Gain on disposal of immovable property shall be exempt from tax if the seller falls under any of the following categories:

1. Dependent of a shaheed belonging to Pakistan Armed Forces;

2. Dependent of a person who dies while in service of the Pakistan Armed Forces or the Federal and Provincial Governments or

3. Person to whom the immovable property is allotted as an original allottee, duly certified by the official allotment authority. It is exempt on first sale by the original allottee.

B) Property Acquired on or After 01-07-2016

Tax on capital gain on disposal of such properties shall be computed as per the following table:

1) Holding period upto one (1) year taxable @ 10%

2) Holding period more than one (1) year but less than two (2) years taxable @ 7.5%

3) Holding period more than two (2) year but less than three (3) years taxable @ 5%

4) Holding period more than three (3) taxable @ years 0%

C) Property Acquired Before 01-07-2016

Tax on capital gain on disposal of such properties shall be computed as per the following table.

1) Holding Period upto three (3) years taxable @5%

2) Holding period more than three (3) years taxable @ 0%

Note: The tax rate shall be reduced by fifty per cent (50%) on the first sale of immoveable property acquired or allotted to ex-servicemen and serving personnel of Armed Forces or ex-employees or serving personnel of Federal and Provincial Governments, being original allottees.

CAPITAL GAIN ON DISPOSAL OF SECURITIES (37A]

'Securities' is a category of 'capital assets' introduced through the Finance Act, 2010. 'Security' means the following capital assets:

1. Share of a public company;

2. Voucher of Pakistan Telecommunication Corporation ;

3. Modaraba certificate;

4. An instrument of redeemable capital;

5. Debt securities; and

6. Derivative products (e.g., treasury bonds) .

'Debt Securities' means - [37A(3A)]

1. 'Corporate Debt Securities' such as Term Finance Certificates (TFCs), Sukuk Certificates (Sharia Compliant Bonds), Registered Bonds, Commercial Papers, Participation Term Certificates (PTCs) and  all kinds of debt instruments issued by any Pakistani or foreign company or corporation registered in Pakistan; and 

2. 'Government Debt Securities' such as treasury Bills (T-Bills), Federal Investment Bonds (FIBs), Pakistan Investment Bonds (PIBs), Foreign Currency Bonds, Government Papers, Municipal Bonds, Infrastructure Bonds and all kinds of debt instrument issued by Federal Government, Provincial Government, Local Authorities and other statutory bodies.

Note : The 'derivative products' include future commodity contracts entered into by the members of Pakistan Mercantile Exchange whether or not settled by physical delivery.

'Derivatives' 

is a general term for financial assets that are "derived" from other financial assets. For example an option to buy a treasury bond, the option (one financial asset) is derived from the bond (another financial asset). The value of the option depends on the performance of the bond . This can be taken a stage further. For example, the value of an option on a futures contract depends on the performance of the futures contract, which in turn will vary with the value of the underlying contract of security. Derivatives exist for assets (like equities or bonds) as well as for interest rates, currency exchange rates and stock market indices. The main advantage of derivatives is that they give investors leverage in the market in which they are trading. This can either enhance their returns or help to hedge risks .

Taxation of Gain on Securities [Division - VII of Part - I of First Schedule]

Capital gain arising from disposal of 'securities' shall be treated as a separate block of income and charged to tax at the following rates:

Tax Rates for Cash Settled Derivatives

The rate of tax on cash settled derivatives traded on the stock exchange shall be 5% for the tax years 2018 to 2020. 

Notes:

1. Any gain on disposal of 'securities' by a banking company or an insurance company shall not be taxable under section 37A. 

2. Holding period of a security shall be reckoned from the date of its acquisition to the date of its disposal. 

LOSS on Disposal of Security [37A(5)]

Any loss sustained by a person on disposal of 'securities' shall be treated separately from any other loss sustained by him. This loss shall be dealt with as below:

1. Any loss sustained on disposal of a 'security' in a tax year shall be set-off only against any gain of the person from any other 'security' disposed off during that tax year; and

2. Loss on disposal of a 'security' shall not be carried forward to the subsequent tax year.

CAPITAL GAIN TAX [100B & Eighth Schedule]

Capital gain on listed securities covered u/s 37 A is taxed under separate tax regime (STR). Capital gain and tax on such securities shall be computed, determined, collected and deposited according to the rules specified in the Eighth Schedule.

The above provisions are not applicable to the following persons :

1. A mutual fund;

2. A banking company;

3. A non-banking finance company;

4. An insurance company subject to tax under the Fourth Schedule:

5. A modaraba;

6. Any other person or class of persons notified by the FBR; and

7. A person who intends not to opt for determination any payment of tax under Eighth Schedule. Such a person shall file an irrevocable option to NCCPL after obtaining prior approval from Commissioner. Under such a case exemption from enquiries regarding source of investment shall not apply. [R-5]

RULES FOR COMPUTATION OF CAPITAL GAIN ON LISTED SECURITIES [8th Schedule]

Manner and Basis of Computation of Capital Gain and Tax Thereon [R-1]

1. Capital gain on listed securities shall be computed as per Eighth Schedule and tax on it shall be collected and deposited on behalf of the person earning the income by National Clearing Company of Pakistan Limited (NCCPL) in the manner prescribed in the Income Tax Rules, 2002. For this purpose the NCCPL shall develop an automated system.

2. Central Depository Company of Pakistan Limited (CDC) shall furnish the required information to NCCPL for discharging it obligations. If the said information is not provided, NCCPL shall forward the details to CIR who shall exercise the powers to enforce furnishing the information, etc.

3. The Asset Management Companies, Pakistan Mercantile Exchange and any other person shall furnish the information when required by NCCPL for discharging its obligations.

4. Capital gain on disposal of units of open end mutual funds and gain or loss on trading of future commodities contracts on Pakistan Mercantile Exchange shall be determined as per Eighth Schedule and tax thereon be collected and deposited on behalf of taxpayer by NCCPL.

5. NCCPL shall issue an annual certificate to the taxpayer of taxable capital gain for the financial year. A certificate for a shorter period may be issued by NCCPL if so requested by the taxpayer or required by the Commissioner. This certificate shall be considered as conclusive evidence in respect of such income and shall be filed by the taxpayer along with his return of income.

6. Within forty-five (45) days of the end of each quarter the NCCPL shall furnish to the FBR a prescribed statement of capital gain in that quarter and tax computed on such income. Tax shall be computed by applying the rates specified in Division-VII, Part-I of First Schedule. 

7. The 'Super Tax' u/s 48 shall also apply to the 'taxpayer subject to tax under Eighth Schedule. Super Tax shall be charged at the rates specified in Division-llA of Part-I of the First Schedule. 

Sources of Investment [R-2] 

Under the following cases enquiries about the sources of investment made by a person in listed companies shall not be made: 

1. Investment till 30-06-2012: If the following conditions are fulfilled: 

  i) A statement of investments is filed with the Commissioner along with the return of income and wealth statement for the tax year 2012; and 

  ii) The amount remained invested for a period of 45 days up to 30-06-2012 in the prescribed manner. 

2. Investment Between 10-07-2012 and 30-06-2014: If the following conditions are fulfilled: 

  i) The amount remained invested for a period of 120 days in the prescribed manner; 

  ii) Tax on capital gains, if any, had duly been discharged in the manner laid down in Eighth Schedule; and 

  iii) A statement of investments if filed with the Commissioner along with the return of income and wealth statement for the relevant tax year. 

Note: Amount of investment shall be calculated in the prescribed manner, excluding market value of net open sale position in futures and derivatives, if such sale is in a security that constitutes the said investment. 

Non-applicability of Certain Provisions of Income Tax Ordinance, 2001 [R-3] 

Respective provisions for collection and recovery of tax, advance tax and deduction of tax at source laid down u/s 137 through 158 of the Income Tax Ordinance, 2001 shall not apply on the capital gains subject to tax under Eighth Schedule. There is only one exception, i.e., the NCCPL may refer to the FBR a particular case for recovery of tax where it is unable to recover the amount of tax. Under such a case the provisions relating to recovery of tax shall apply. 

Payment of Tax Collected by NCCPL [R-4] 

The amount collected by NCCPL under the Eighth Schedule shall be deposited in a separate bank account maintained in National Bank of Pakistan. This amount (along with interest accrued thereon)  shall be paid to the FBR on yearly basis by 31st day of July next following the financial year in which collection was made. 

Responsibility and Obligation of NCCPL [R-6] 

1. An authorized authority shall conduct regular system and procedural audits of NCCPL on quarterly basis to verify the implementation of applicable rules. The authorities entitled to conduct such audit may be: 

i) Pakistan Revenue Automation Limited (PRAL); 

ii) A company incorporated under the Companies Ordinance, 1984; 

iii) Any other company or firm approved by the FBR; and 

iv) Any authority appointed u/s 209 of the Income Tax Ordinance, 2001, not below the level of an Additional Commissioner Inland Revenue. 

2. The recommendations of audit report as approved by the Commissioner shall be implemented by NCCPL, who shall also make necessary adjustments for short or excessive deductions of tax. Under this case no penal action shall be taken against NCCPL on account of any error, omission or mistake that has occurred from application of the system. 

3. NCCPL shall refer a particular case to the FBR for recovery of tax if it is unable to recover the amount of tax. 

Note: For detailed rules in this regard the reader is advised to refer to Rules 13A through 13P of the Income Tax Rules, 2002. 

TREATMENT OF CAPITAL LOSSES [38] 

While computing the income chargeable to tax under the head "Capital Gains", any losses on disposal of capital asset (taxable under NTR) shall be dealt with as below: 

1. Any capital loss shall be deducted from capital gain on disposal of any other capital asset. [38( 1 )] 

2. Where a gain on disposal of a capital asset is not chargeable to tax, the loss in respect of such asset cannot be deducted while computing income under the head "Capital Gain". [38(2)] 

3. Loss on disposal of capital asset is computed by deducting the consideration received on disposal out of the cost of the asset. [38(3)] 

4. Any loss on disposal of the following assets is not recognized under the Income Tax Ordinance, 2001: [38(5)] 

  

  i) A painting, sculpture, drawing or other work of art 

  ii) Jewelry; 

  iii) A rare manuscript, folio or book; 

  iv) A postage stamp or first day cover; 

   v) A coin; 

  vi) A Medallion; and 

  vii) An antique. 

Notes: 

1. Non-recognition of a loss means that such a loss cannot be set-off or carried forward against other incomes. 

2. Section 38(5) prohibits the recognition of certain capital losses. However, it is silent about the gains in respect of above-referred assets. It means any such gain will be recognized and chargeable to tax. 

3. Loss on disposal of a 'security' shall not be covered under this section (i.e., section 38), rather, shall be treated as discussed under section 37A. 

COST OF ACQUISITION [Rule-13K(d)] 

'Cost of Acquisition' of any security means the market price of the security which the investor pays or would have paid to purchase such security. Besides this general rule, the following principles shall apply while the cost of securities acquired: 

Other relevant topics

Diroctroate General Immmoveable Property

Property Valuation under the Income Tax Ordinance, 2001

CLICHED