Wednesday, 4 June 2014

For less than 12 months: Proposal put forward to increase Capital Gains Tax to 12.5%

Tax not applicable on sale of stocks after holding period of 2 years.
KARACHI: 
The government has proposed to increase the capital gains tax (CGT) rate on the trade of securities with a holding period of less than 12 months by 2.5% in 2014-15.
Addressing the budget session on Tuesday, Finance Minister Ishaq Dar proposed that the CGT rate on the sale of shares within a year of their purchase should be increased to 12.5% while the hike on the sale of stocks with a holding period of more than 12 months, but less than 24 months, should be 10%.
CGT will not be applicable to the sale of stocks after a holding period of two years, Dar proposed.
CGT is calculated on the basis of the amount that exceeds a share’s purchasing price. This means an investor will be required to pay Rs1.25 in CGT in case he sells a share for Rs110 within a year of buying it for Rs100.
Contrary to the general perception, CGT applies to investors, not brokers. Increasing the CGT rate is expected to discourage investors from active buying and selling of shares, thus reducing overall stock market liquidity.
In the outgoing fiscal year, the CGT rate on the sale of securities is 10% for the holding period of less than six months and 8% for the holding period of six to 12 months.
Originally, the CGT rate applicable to shares with a holding period of less than six months was due to increase from 10% in 2012 to 12.5%, 15% and 17.5% in the following years. There was no CGT on the sale of securities after holding them for a year.
However, the government kept the rate unchanged at 10% for the last two years. It meant the CGT rate was supposed to go up by 7.5% to 17.5% in one go in 2014-15. But instead of raising it substantially at once, the government has proposed to increase it by 250 basis points for 2014-15.
Speaking to The Express Tribune, Topline Securities CEO Mohammad Sohail said the stock market is likely to react positively to the less-than-expected increase in the CGT rate.
Similarly, in a research note issued to its clients on Tuesday, KASB Securities said the reduction of the CGT rate from the originally proposed 17.5% to 12.5% constitutes ‘considerable lowering’ and will be received positively by local domestic investors.
The CGT collection in July-April remained Rs1.5 billion. The National Clearing Company of Pakistan (NCCPL) collected Rs1.2 billion in CGT during 2012-13 from individual investors, brokers and corporate entities. The NCCPL is not authorised to collect CGT from mutual funds, banks, non-banking finance companies, insurance companies and modarabas, as they pay their CGT directly to the FBR.
Higher advance tax on interest income, dividends
The finance minister proposed that 5% additional advance tax should be deducted from the payment of dividends and income in case the recipient is a non-filer of income tax returns. Later on, they can claim adjustment of the additional tax paid in case they file their returns, he said.
However, the additional tax on income will not be deducted if someone’s total income on interest is less than Rs500,000, it is proposed.
Foreign institutional investors
Currently, foreign institutional investors are not required to file their returns nor are their taxes on capital gains collected. The budget envisages that foreign institutional investors be brought under the tax regime, thus broadening the tax regime.
Published in The Express Tribune, June 4th, 2014.

Telecom receives much-needed relief

FED removed, withholding tax reduced by 1%. PHOTO: FILE
KARACHI: In a move that will provide the much-needed relief to the heavily-taxed telecommunication sector, the government withdrew federal excise duty (FED) on telecom services from provinces already charging general sales tax (GST) and reduced withholding tax by 1 percentage point.
“In order to simplify the tax regime, it has been decided to withdraw FED from those provinces which have imposed GST on telecom services,” Finance Minister Ishaq Dar said in his budget speech.
This reform in the tax regime is in line with expectations of the telecom sector that had been lobbying for a centralised tax regime to avoid double taxation – the telecom sector was previously paying a whopping 19.5% GST and as much FED to provinces and federation respectively.
For provinces where no GST is charged, the government has reduced the FED from the current 19.5% to 18.5%, according to the draft of Dar’s  speech. However, this 1% reduction in FED is far from the industry’s recommendation of reducing the same by 2.5%.
Another tax benefit to the telecom sector came in the form of reduction in Withholding Income Tax on telephone services. The finance ministry reduced the advance income tax on telecom services from the current 15% to 14% – this also disregards the recommendations of the telecom lobby that had proposed to reduce the withholding tax by 5% to 10%.
In addition to the aforesaid relaxations, the finance ministry – in accordance with the already-announced policy – also proposed to reduce the corporate tax rate by one percentage point. The corporate tax rate shall be 33% for FY2014-2015, Dar informed in his speech.
Telecom sector has been contributing significantly to the national exchequer – cellular mobile companies, alone, paid $5.4 billion in taxes in the last five years, at an average of over $1 billion a year. Besides that, four of the five cellular mobile operators (CMOs) functioning in the country have invested $1.1 billion earlier this year by purchasing licences for 3G and 4G mobile internet services that have already started to roll out.
Though not all of the telecom sector’s recommendations were accepted by the finance ministry, whatever relief is given to the sector would be welcomed by the industry.
Retail sector
The finance ministry also proposed to bring – the largely undocumented – retail sector under the tax net by making it compulsory for all retailers to obtain their national tax number (NTN) while seeking electricity and gas connections for their businesses.
“Because of a variety of reasons, most of the retailers are still not under the tax net,” Dar said. “After carefully studying the issue, we’ve concluded that most of the retailers are willing to pay their due share of taxes but they want a simple and easy method of doing so,” he said.
The finance ministry, therefore, introduced a two-tier Simplified Sales Tax Regime for Retailers and categorised the retailers accordingly.
The first-tier comprises retailers who operate as part of national and international chain stores, operate in air-conditioned shopping plazas, have [point-of-sale] machines for credit or debit cards, or have monthly electricity bills in excess of Rs50,000, according to the draft of Dar’s  speech.
“These retailers will be required to pay GST in the normal regime and to keep electronic cash register of approved-specifications in order to record their transactions,” the finance minister said.
All remaining retailers will fall in the second tier.
For tier II retailers, the ministry would introduce a mechanism for payment of sales tax through the retailers’ electricity bills, the minister said. “Thus, retailers having electricity bills of less than Rs20,000 in a month shall be charged only 5% of the bill as sales tax on retail sales while those with higher bills shall be charged 7.5% as sales tax on retail sales.”
The finance ministry proposed to link the utility bills of retailers with their NTN, which would help the government in tracing the tax record of retailers – both the already-established players and the new entrants.

Defence spending jacked up by 11.1%

After Rs73b increase defence budget for 2014-15 stands at Rs700.2b. PHOTO: FILE
ISLAMABAD: 
Pakistan has raised its defence spending by 11.1 per cent for the coming fiscal year amid reports that the army is preparing for the final push against Taliban militants holed up in the tribal areas bordering Afghanistan.
Defence budget has been jacked up to Rs700.2 billion for the financial year beginning July 1, compared with Rs627.2 billion allocated in the outgoing fiscal year, showing an increase of Rs73 billion. The military had sought an increase of Rs173 billion.
Military officials defended the increase insisting that Pakistani military’s expenses are the lowest in the region given the volatile security environment.
The budget document presented before the parliament did not give a breakdown of the allocations for the three forces. But according to defence ministry officials, out of the whole defence budget, Pakistan Army gets 48% while 20% goes to air force and navy’s share is 10%.
According to the budget document, out of Rs700.2 billion, Rs293.5 billion has been allocated for employees-related expenses, Rs180.2 billion for operating expenses and Rs152.8 billion has been earmarked for physical assets.
However, the figures do not include Rs163.4 billion allocated for pensions of the servicemen that would be given from the civilian budget and a separate allocation for security-related expenses in a move which, critics say, seeks to conceal the actual defence budget.
Additionally, the military would also be given Rs165 billion under the contingent liability and Rs85 billion under the Coalition Support Fund (CSF). This means that in reality a whopping Rs1113 billion has been allocated for the military, which is about 28.2% of the country’s total budget.
Defence budget has remained a sensitive and controversial subject in the country where it has never been debated in detail in the parliament. Of late, however, there have been calls for a greater scrutiny. And Senate’s defence committee recently took the initiative to publicly discuss the military spending.
Pakistan raises its defence spending every year because of its historically uneasy relations with arch-rival India.
New Delhi earlier this year jacked up military spending by 10% for the coming fiscal year as it seeks to counter China’s rapid military buildup and its traditional rival Pakistan.
Defence analysts believe given the internal security challenges much of the increase in the defence budget by Pakistan is likely to be spent on the fight against militancy.

We won't force Rakitic to stay, say Sevilla

We won't force Rakitic to stay, say Sevilla
The club have made it clear they will not keep any player who has set their heart on a transfer but insist the Croatia star will only leave for the right price
Sevilla president Jose Castro insists his team "have no need to sell" Ivan Rakitic - but says that he will not stand in his way should the midfielder ask to leave.

The Croatia international has been linked with a number of top European sides after an inspired 2013-14 season in which he led Sevilla to fifth place in La Liga and Europa League glory.

The 26-year-old's father revealed this week that La Liga's top three – Real Madrid, Atletico Madrid and Barcelona – had put offers on the table for his son's services.

While Castro admits he would not force Rakitic to stay, he claims the playmaker has had a significant contract offer from Sevilla and that the club do not need to cash in on their star man.

"The last offer we made to Rakitic was a significant percentage of our total budget," Castro told Sevilla's television channel.

"We made this offer because we want him to sign.

"We want to make sure that he stays, not that he leaves. We want the team to be strong and for all Sevillistas to enjoy it.

"We won’t make anyone stay who doesn’t want to be at Sevilla. Anyone who wants to walk through the door can do it, though it has to be at our price.

"We are relaxed and we have no need to sell."

Rakitic, whose current deal with Sevilla expires in 2015, is currently preparing for the World Cup with Niko Kovac's Croatia squad.

Fabregas should come back to Arsenal, says Cazorla

Fabregas should come back to Arsenal, says Cazorla
The Gunners playmaker is keen for the Barcelona midfielder to spurn the likes of Chelsea and Manchester City to rejoin the club whom he left for Camp Nou in 2011
Arsenal midfielder Santi Cazorla is keen for Cesc Fabregas to turn down the Premier League teams chasing him and to return to north London this summer.

It has been revealed that Manchester City are preparing a €37 million bid for the Barcelona star, who is widely expected to leave Camp Nou, but Chelsea join Manchester United, Liverpool and the Gunners in also monitoring his situation.

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Fabregas spent eight years with Arsene Wenger's side before rejoining the club who oversaw his development at youth level in 2011 and Cazorla believes that it would be a good fit for his Spain team-mate.

"I have read that Cesc could go to Chelsea but I prefer it if he came to Arsenal. He has given a lot to the club and he knows it well," the ex-Villarreal star told reporters ahead of La Roja's final World Cup warm-up game against El Salvador.

"I hope that he is happy, he chooses his club well and is comfortable there."

Cazorla argues that Fabregas's performances for Barcelona have not merited some of the criticism that has been sent his way and believes that he would be warmly welcomed back on British shores.

The playmaker added: "I don't see any differences between his performances in the Premiership and with Barca.

"His record is spectacular at Barcelona and he has demonstrated that he has adapted but they haven't given him the same value as in England.

Tuesday, 3 June 2014

Every Pakistani now owes Rs82,627

With debt servicing on the rise, long-term debt becomes saving grace. PHOTO: FILE
KARACHI: 
Every Pakistani is worse off by an additional Rs4,700 as the total debt stock of the country, when distributed on its population, comes to around Rs82,627 per head against Rs77,927 last year.
Pakistan’s outstanding debt has reached Rs15.53 trillion up till March 2014, rising 7.4% from Rs14.46 trillion, according to the Economic Survey 2013-14.
Major chunk of the total debt comes from domestic sources, which increased by Rs1.30 trillion to Rs10.82 trillion. External debt stock stood at Rs4.71 trillion.
The survey says that the public debt to GDP ratio improved to 61.2% from 63.9% in the previous fiscal year. But this slight improvement still falls short of meeting the 60% target set under the Fiscal Responsibility and Debt Limitation Act.
Worryingly, 47% of whatever the government generates in revenue between July-March 2013-14 went to paying off the debt against 44% in the previous year.
“Ideally, this ratio should be less than 30% to allocate more resources to social and poverty related expenditures,” the survey said.
In rupee terms, debt servicing was Rs1.15 trillion.
But what is encouraging is the fact that most of this increase in new debt came from long-duration instruments like Pakistan Investment Bonds, Ijara Sukuk bonds and Prize Bonds, which have maturity duration spreads of over 3,5, 10 or longer years.
This is particularly important since Pakistan is stuck in a vicious cycle of debt where every few months it borrows from commercial banks just to pay off past loans.
Highlighting this fact, it said that 73% of this increase in domestic debt came from permanent debt.
This has happened as the government has been sending signals to the market that it has decided to lengthen the maturity of domestic debt — a key goal it has set to manage the country’s finances.
But the survey warned that around 51% or Rs5.55 trillion of domestic debt has to be repaid within a year. That means government will once again borrow to settle these Rs5.55 trillion.
This is because of the shorter duration floating debt, which is raised by the government through treasury bills. Share of floating debt in domestic public debt stood at 50% as of March 2014 against 55% at the end of the last fiscal year.
Floating debt increased by Rs244 billion against Rs633 billion in same period of the previous year, depicting a marked improvement in debt portfolio management.
Domestic debt servicing was Rs855 billion against Rs725 billion paid in same period of previous year.
A large portion was paid against treasury bills (Rs260 billion), market-related treasury bills (Rs181 billion) and Pakistan Investment Bonds (Rs147 billion).
Pakistan’s external debt and liabilities stood at $61.8 billion as of March 31, 2014, rising by $906 million in previous nine months.
Most of this external debt is made up of loans from multilateral lenders and Paris Club. Islamabad owes International Monetary Fund (IMF) around $3.6 billion.
External debt servicing consumed $5.38 billion.
The average time when all this external debt matures and has to be paid off is approximately 10.8 years.
Sovereign guarantees
Islamabad does not include sovereign guarantees, which are basically commitments on the part of the state, in its outstanding debt obligations.
Government guarantees, which stood at Rs714.6 billion as of November 2013, came down to Rs558 billion by end March 2014, according to the survey.
This is despite the fact that the government issued fresh guarantees of Rs104 billion. No explanation has been given for such a sharp reduction in contingent liabilities.
From 2007 onwards, the government has increased the pace of giving guarantees to public sector enterprises (PSEs), which are running in loss and cannot borrow money from commercial banks due to their weak balance sheets.
These organisations include Trading Corporation of Pakistan, Pakistan International Airlines (PIA) etc.
Sovereign guarantees do not have any direct impact on the budget. These are just guarantees — promise from the government to the lender that if a PSE defaults it will step in to meet the financial commitment.
Economist Kaiser Bengali explains that it does affect lives of the citizens one way or another. “The borrowing rate for the government goes up as sovereign guarantees climb,” he says.
“International financial markets pick up the signals and then they charge our government a premium.”
But what if a PSE actually defaults? “Well the government would eventually have to foot the bill,” explains Bengali.
Such a disastrous event has not technically occurred up till now but whenever the government has sold loss-making state-run companies, it has picked up all their liabilities – spending the taxpayers’ money meant for social services such as schools, hospitals, or, say, the eradication of polio.
Take the national flag carrier, for example. Years of successive losses have wiped off PIA’s equity completely. But the airline is still running, paying salaries to 16,000 plus employees, leasing airplanes and servicing its debt by borrowing fresh loans from banks.
Now, no bank would lend billions of rupees due to the weak strength of PIA’s balance sheet. This is where government guarantees come in, which have helped the airline borrow Rs306 billion.
“If PIA does not come out of the losses and the government decides to sell it then obviously it would have to take responsibility for all those loans,” says Kaiser Bengali.
“This is actually what has happened in all such privatisations so far.”

Growth continues in telecom sector

Tele-density reaches all-time high of 78%, up 3% from 2013. PHOTO: FILE
KARACHI: 
The spectrum auction – would create 900,000 new jobs in the country; increase data penetration by up to 10% during the next three years and increase GDP growth by 1.5% to 1.8%, according to the Economic Survey of Pakistan, which was revealed by Finance Minister Ishaq Dar on Monday.
As per details of the document, the country’s telecommunication sector continued its growth trend as the overall tele-density reached an all-time high of 78% during July-March period for the fiscal year (FY) 2014, up by three percentage points compared to 75% as of June 30, 2013.
Telecom sector indicators showed positive growth during the nine-month period ending March 31, 2014. Telecom sector’s revenues, during the review period, reached Rs345.5 billion and total investment in the sector stood at $556 million, according to the Survey. The sector contributed Rs67 billion in taxes to the national exchequer during the first six months of FY2014, the document revealed.
The finance ministry’s review of the telecom sector’s performance showed that major growth arose in the cellular mobile segment. The number of mobile phone subscriptions in the country grew from 127.7 million as of June 30, 2013 to 136.5 million by the end of March, 2014.
Despite high competition and low tariffs, the telecom sector had stable revenues, the document stated. It earned Rs38 billion a month on average during the first nine months of FY2014, compared to a monthly average of Rs37 billion in FY2013.
Telecom sector has been contributing significantly to the national exchequer in terms of taxes, regulatory fee, activation tax and other charges. It is one of the highest contributors to the national exchequer, putting Rs119 billion a year – $1.2 billion in today’s exchange rate – on average during the last five years.
The telecom sector paid Rs11 billion a month in taxes during the first half of FY2014 compared to an average Rs10 billion it put in the national kitty every month during FY2013.
The first 10 months of FY2014 remained significant for the telecom sector that took a giant leap forward in the world of technology by conducting next-generation mobile services (NGMS) licence auction that earned the country more than $1 billion, according to the Economic Survey.
The government raised $1.11 billion from the spectrum auction on April 23, 2014. In addition to the bid amounts, the operators also have to pay a 10% advance tax on the total auction winning price to Pakistan Telecommunication Authority (PTA), which will take the auction’s total revenue to $1.22 billion.
Moreover, investment in the telecom sector is expected to increase in FY15 due to unsold spectrum, according to the Economic Survey – the government could not sell the entire spectrum as the 850 MHz spectrum was reserved for a new player and another 10MHz of spectrum in 4G band remained unsold in this year’s auction.