Chairman Securities and Exchange Commission of Pakistan (SECP) Mr. Farrukh Sabzwari has requested FBR to consider revising the different tax rates on ‘security’ and ‘share’.
According to the Income-tax Ordinance 2001, stake in a listed company is classified as ‘security’, while stake in an unlisted company is classified as ‘share’.
The Chairman argued that the classification of investments in a company as ‘share’ or‘ security’ greatly effects the tax liability on the returns, from that particular investment. Profits from the disposal of shares are taxed under section 37, whereas profits from selling security are taxed under section 37-A. The problem is that the tax rates under section 37 are significantly higher than the rates under section 37-A.
Furthermore, the Sindh High Court had ruled in 2016 that, only the shares acquired after the listing of a company in the stock exchange would be considered as security, while the investment before the listing of the company would still be classified as share.
Officials said that the High Court ruling had adversely effected the initial investors of all the new companies and requested the investments to be considered as ‘security’, from the day of investment, whose returns should be taxed under section 37-A instead of section 37.
Moreover, SECP officials argued that before listing, a company offers shares as Initial Public Offering (IPO) and people invest through the IPO, only after the completion of this IPO phase a company can be listed in the stock exchange. Therefore, it’s a procedure that investors should not be penalized for and FBR should tax the return on such investments under section 37-A.