Capital gains tax is a levy imposed on profits generated from the sale of capital assets. In Pakistan, capital gains tax applies to various assets, including stocks, real estate (with exceptions), and certain types of personal property. This guide delves into the key aspects of capital gains tax in Pakistan, helping you navigate your tax obligations effectively.
Who Pays Capital Gains Tax?
The Income Tax Ordinance, 2001, dictates capital gains tax in Pakistan. As per Section 37(1), any taxpayer who disposes of a capital asset and generates a profit in a tax year (except for exempt gains) is liable to pay capital gains tax. This applies to both individuals and non-individual investors.
What are Capital Assets?
Section 37(5) of the Ordinance defines a capital asset as “property of any kind held by a person, whether or not connected with a business.” However, there are specific exclusions:
- Business Assets: Stock-in-trade, consumable stores, and raw materials used for business purposes are not considered capital assets.
- Depreciable Assets: Property for which depreciation is claimed under Section 22 or amortization under Section 24 is excluded.
- Personal Property: Movable property used by an individual or their family dependents is generally exempt, with some exceptions (explained later).
Tax Rates and Exemptions
The applicable tax rate for capital gains depends on the type of asset and the holding period. Here’s a breakdown:
Securities:
- Purchased before July 1, 2013: Exempt from capital gains tax.
- Purchased on or after July 1, 2013, but before July 1, 2022: Taxed at a flat rate of 12.5%.
- Purchased on or after July 1, 2022: Tax rates may vary depending on the specific holding period.
Immovable Property (Land and Buildings): Generally exempt for residential property owned and used by the taxpayer (exceptions may apply).
Other Capital Assets: Tax rates may vary depending on the asset type and holding period. It’s crucial to consult the latest tax schedules for specific details.
Tax Calculation and Payment
The capital gain amount is calculated by subtracting the cost of the asset from the consideration received upon its disposal (Section 37(2)). This difference represents the taxable gain.
For investors in securities traded on stock exchanges, the National Clearing Company of Pakistan Limited (NCCPL) deducts and deposits capital gains tax on their behalf at the time of transaction settlement. However, for other assets, the taxpayer is responsible for calculating and paying the tax.
Record Keeping Requirements
Taxpayers are obligated to maintain specific records for verification purposes (Rule 13I). These records include:
- Fortnightly statements from brokerage accounts.
- Central Depository Company (CDC) statements.
- Records of security holdings and value on June 30th of each year.
- Records of cash and funds deposited/withdrawn from brokerage accounts.
Information Sharing
The Federal Board of Revenue (FBR) can directly obtain investor information from the NCCPL, simplifying the process (Rule 13J).
Understanding capital gains tax in Pakistan is essential for individuals and businesses dealing with the sale of capital assets. This guide provides a foundational understanding of the applicable rules and regulations. However, for specific tax situations, it’s highly advisable to consult with a qualified tax advisor who can offer personalized guidance based on your unique circumstances and the latest tax updates.
