960421

KSE plea to CBR

against levy of tax

on right shares

RECORDER REPORT

KARACHI: In what may be called a case of delayed reaction, the Karachi Stock Exchange authorities are now perturbed over a circular, issued by the Central Board of Revenue about three months ago, which envisages levy of tax on right shares.

The CBR issued a circular on Jan 31 last which interprets section 12(12) of the Income Tax Ordinance, 1979, according to which, if right shares are issued by a company at a price less than the market price, the difference between the sale price and the market value will be deemed to be a taxable income in the hands of the shareholders.

The KSE authorities have asked the CBR to review its interpretation of the ban for greater development of the capital market.

The relevant portion of the circular reads as under:

"A question has been raised as to whether or not provisions of section 12(12) of the Income Tax Ordinance are attracted in the case right shares issued by a company to its shareholders at par where the break up value and the market price of the share is higher.

"The aforementioned question has been examined and it is clarified that sub-section (12) of section 12 of the Income Tax Ordinance is applicable in the foregoing situation as all conditions stated therein are fulfilled i.e. a share is an asset for a shareholder, price paid is less than its value and company is the seller. Such treatment appears equitable when viewed in the context of taxation of dividend and bonus shares".

Sub-clause (i) of clause (4A) of Section 2 of the Repealed Act was amended by the Finance Ordinance, 1972 to include "stocks and shares" in the definition of "capital asset". The effect of this amendment is that stocks and shares held by all persons are treated as "capital asset" even when they are held as stock-in-trade and the gains arising out of the disposal are termed as capital gains and are not liable to income tax.

The KSE authorities state that even the gains of dealers in stocks and shares, in whose case the shares are a part of their trade, have been treated as capital gains in order to increase business on the stock market and to support the Capital Market. It is, therefore, against the very philosophy of giving this exemption to give discretion to the income tax officers to treat the difference between the subscription value and the market price of right shares as income of the assessee for the purpose of levy of income tax.

The intent of the framers of clause 12 (12) of the Income Tax Ordinance is to tackle the problem of tax evasion and not to tax capital gains which have been exempted as a matter of principle. Moreover, right shares are subscribed and are not a normal purchase transaction which is the subject matter of section 12 (12).

The difference between the sale price of the right share and market price remains unrealised gain and the buyer may, on actual sale, suffer a loss. The anomaly is that whereas unrealised gain will be taxed while the realised gain on actual sale will be capital gain and thus not taxable, according to the KSE.

It is also pointed that the bonus shares are not taxed in the hands of the shareholders and it is thus not a comparable situation. Even of "tax on dividends is not a comparable situation because dividends are taxed at a low rate whereas by bringing the unrealised capital gain on right shares within the mischief of section 12 (12), the normal tax will be leviable.