Taxing capital

LAHORE: Two sectors that escape normal tax in our country are real estate and the stock market. Real estate that is retained without utilisation blocks productive investment. The capital market investment generally deprives small investors and enriches big players without paying income tax.

With the budget on the card experts say that through proper taxation the government could generate substantial tax from these sectors. In the coming budget, the government for instance intends to tax all reserves accumulated by listed companies by withholding dividends to the stakeholders.

The argument that the reserves are built to finance future expansions, are not valid. In fact, the built up reserves constantly dilute in dollar terms the currency required normally for expansion. Under this excuse, small stakeholders are unduly deprived of the dividends.

Moreover, in case of stocks, the tax authorities must distinguish between short-term and long-term capital gains. Short-term gains usually refer to profits made on stocks held for a relatively short period, typically less than a year. Long-term gains apply to stocks held for longer durations. If we look at other countries, we find that in the United States, stock market earnings are generally subject to capital gains tax. The tax rate depends on the holding period of the investment.

If the investment is held for less than a year, it is taxed at ordinary income tax rates. If the investment is held for more than a year, it is taxed at lower rates. In Canada generally, 50 percent of capital gains are included in taxable income, and the tax rate is based on the individual’s marginal tax rate.

In Australia, stock market earnings are subject to capital gains tax. The tax rate depends on the individual’s income and the holding period of the investment. If the investment is held for longer than 12 months, individuals are eligible for a 50 percent discount on the capital gain.

In most of the countries, long-term stock investments are encouraged and short trading penalised. Most of the top brokers earn billions yearly through short-term trading without paying the tax that similar earners pay from profits in other fields. Some say taxing stocks would ruin the stock market. But has it not already been ruined? Few players control the entire market where new listings are rare.

The number of listed companies in our stock market has been regularly declining since the last decade. There should be a system to deduct at least 5 percent tax on gains on any short traded scrip. Speculators and manipulators would strongly protest, but after a while would take measures to attract buyers, knowing well that their profits would be lower by 5 percent. Property taxes are a common form of real estate taxation. They are typically imposed by local governments and are based on the assessed value of the property.

Assessed value is determined by the government’s appraisal or assessment process. Property taxes are used to fund local services such as schools, infrastructure, and public safety. In fact, the city of London after accounting for all municipal expenses runs a surplus due to property tax it collects. In Pakistan, even large cities like Karachi and Lahore remain starved of funds as the property tax system is flawed.

Real estate in Pakistan is used as a parking place for ill-gotten money. There is a dead investment of trillions of rupees as investors hold on to the properties without building structures. They are either not penalised or nominally charged both in residential colonies and industrial estates.

There are several examples like the industrial plots purchased in Sundar Industrial Estate at Rs3.5 million per acre on the promise that industry would be commissioned within two years. Failing which the estate authority would auction the plot to a new bidder and pay back the original amount to the first buyer. Two decades on, the unconstructed plots are still with the original buyers and the cost has increased over 10 times.