TAX MANAGEMENT HEAD OF INCOME : CAPITAL GAINS

by CAPTAIN (R) ARSAM AFTAB

SEQUENCE
Section 37. Capital Gains What is a Capital Asset What is Not a Capital Asset Computation of Capital Gain Value of Asset S.38.Deduction of Capital Loss Computation of Capital Loss

S.59. Carry forward of capital losses

S.37A.Capital gain on disposal of Securities Q&A

S 37. Capital gains

(1) Subject to this Ordinance, a gain arising on the disposal of a capital asset by a person in a tax year, other than a gain that is exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head Capital Gains.
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What is a Capital Asset?

Sec 2(10) capital asset means a capital asset as defined in section 37; Sec 37(5) In this section, capital asset means property of any kind held by a person, whether or not connected with a business, but does not include

What is NOT Capital Asset?

(a) any stock-in-trade, consumable stores or raw materials held for the purpose of business; (b) any property which is entitled to a depreciation deduction u/s 22 or amortisation deduction u/s 24; (c) any immovable property; (d) any movable property excluding capital assets specified in section 38(5) held for personal use by the person or any member of the persons family dependent on the person
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Capital Assets as per Sec 38(5)

(a) A painting, sculpture, drawing or other work of art; (b) jewellery; (c) a rare manuscript, folio or book; (d) a postage stamp or first day cover; (e) a coin or medallion; or (f) an antique.
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Computation of Capital Gain

(2) Subject to sub-sections (3) and (4), the gain arising on the disposal of a capital asset by a person shall be computed in accordance with the following formula, namely: AB where A is the consideration received by the person on disposal of the asset; and B is the cost of the asset.
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Value of the Asset

(4A) Where the capital asset becomes the property of the person (a) under a gift, bequest or will; (b) by succession, inheritance or devolution; (c) a distribution of assets on dissolution of an association of persons; or (d) on distribution of assets on liquidation of a company, the fair market value of the asset, on the date of its transfer or acquisition by the person shall be treated to be the cost of the asset. 9

Determination of component B
(4) For the purposes of determining component B of the formula in sub-section (2), no amount shall be included in the cost of a capital asset for any expenditure incurred by a person (a) that is or may be deducted under another provision of this Chapter; or (b) that is referred to in section 21.
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Asset held for more than 1 year

(3) Where a capital asset has been held by a person for more than one year, other than shares of public companies u/s 37A, the amount of any gain arising on disposal of the asset shall be computed in accordance with the following formula, namely: Ax where A is the amount of the gain determined under sub-section (2).
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Sec 38.Deduction of losses

(1) Subject to this Ordinance, in computing the amount of a person chargeable to tax under the head Capital Gains for a tax year, a deduction shall be allowed for any loss on the disposal of a capital asset by the person in the year. (2) No loss shall be deducted under this section on the disposal of a capital asset where a gain on the disposal of such asset would not be chargeable to tax.
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Sec 38.Deduction of losses

(5) No loss shall be recognized under this Ordinance on the disposal of the following capital assets, namely:
(a) A painting, sculpture, drawing or other work of art; (b) jewellery; (c) a rare manuscript, folio or book; (d) a postage stamp or first day cover; (e) a coin or medallion; or (f) an antique.
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Computation of Capital Loss

(3) The loss arising on the disposal of a capital asset by a person shall be computed in accordance with the following formula, namely: A B; where A is the cost of the asset; and B is the consideration received by the person on disposal of the asset. (4) The provisions of section 37(4) shall apply in determining component A of the formula in section 38 (3).
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Sec 59. Carry forward of capital losses

(1) Where a person sustains a loss for a tax year under the head Capital Gains (hereinafter referred to as a capital loss), the loss shall not be set off against the persons income, if any, chargeable under any other head of income for the year, but shall be carried forward to the next tax year and set off against the capital gain, if any, chargeable under the head Capital Gains for that year.
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Sec 59. Carry forward of capital losses

(2) If a capital loss sustained by a person for a tax year under the head Capital Gains is not wholly set off then the amount of the loss not set off shall be carried forward to the following tax year, and so on, but no loss shall be carried forward to more than six tax years immediately succeeding the tax year for which the loss was first computed. (3) Where a person has a loss carried forward under this section for more than one tax year, the loss of the earliest tax year shall be set off first.
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What is a security?
Sec 37A(3) For the purposes of this section security means share of a public company, voucher of Pakistan Telecommunication Corporation, Modaraba Certificate, an instrument of redeemable capital; and derivative products.
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S 37A. Capital gain on disposal of securities

(1) The capital gain arising on or after the first day of July 2010, from disposal of securities held for a period of less than a year, shall be chargeable to tax at the rates specified in Division VII of Part I of the First Schedule: Provided that this section shall not apply if the securities are held for a period of more than a year Provided further that this section shall not apply to a banking company and an insurance company.
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Computation of capital gain on disposal of securities

(2) The holding period of a security, for the purposes of this section, shall be reckoned from the date of acquisition (whether before, on or after the thirtieth day of June, 2010) to the date of disposal of such security falling after the thirtieth day of June, 2010. (4) Gain under this section shall be treated as a separate block of income.
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Computation of capital loss on disposal of securities

(5) Notwithstanding anything contained in this Ordinance, where a person sustains a loss on disposal of securities in a tax year, the loss shall be set off only against the gain of the person from any other securities chargeable to tax under this section and no loss shall be carried forward to the subsequent tax year.
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TABLE
PERIOD 1. Where holding period of a security is less than six months. 2. Where holding period of a security is six months or more but less than twelve months.
TAX YEAR 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 -------RATE 10% 10% 12.5% 15% 17.5% 10% 10% 12.5% 15% 17.5% 0%

3. Where holding period of a security is one year or more.

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