Pakistan: Changes in the capital gains tax regime

Advance tax on the sale of shares of private and public unlisted companies

The Federal Government has enforced certain taxation measures through promulgation of the Finance (Supplementary) Act, 2023 [the “Act”], effective from 24 February 2023. These measures include amendment to Section 37 of the Income Tax Ordinance 2001 [the “Ordinance”], relevant to the taxation of capital gains on the sale of shares other than listed shares. According to this amendment, the persons acquiring shares of private companies and public unlisted companies are required to deduct advance tax from the gross consideration paid for these shares. The amount of tax deduction is calculated at the rate of ten per cent (10%) of the value calculated based on the fair market value (FMV) of shares as per the method prescribed under the income tax rules, but without reduction of liabilities.

The tax deducted from the consideration is required to be deposited with the Federal Government within fifteen (15) days — which shall be considered an adjustable advance tax for the seller. Default in complying with the new requirements shall attract penalties and default surcharges of the ordinance.

The person disposing of the shares is required to file prescribed information relating to the transaction with the Commissioner Inland Revenue within thirty (30) days of the transaction. The Commissioner has been empowered to call for relevant information through notice earlier than thirty (30) days. An application for specific exemption from withholding tax can be filed with the Commissioner where applicable.

Off-market settlement of securities

Capital gains on the disposal of securities are currently chargeable at fixed tax rates applicable as per section 37A of the Ordinance. The securities include shares of a public company, voucher of Pakistan Telecommunication Corporation, Modaraba Certificate, an instrument of redeemable capital, debt securities, units of exchange-traded funds and derivative products. These tax rates vary based on the nature of the security, holding period and date of its acquisition. The Act has excluded those transactions of securities which are disposed other than through registered stock exchange or settled through the National Clearing Company of Pakistan Limited (NCCPL). Accordingly, said transaction will be chargeable under the (amended) Section 37 of the Ordinance.

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