Tax on capital gains on share needs clarification
Saturday, 20 March 2010
Akhter Zamil
Is the gain/profit on sale of shares and securities subjected to income tax under prevalent tax law of the country? When the transactions of "capital assets can be termed as business income in place of "capital gains"? When the question of "capital gains" out of any transactions relating to capital assets arises?
It is "gain" when a "capital asset" is transferred to and from any person by way of "sales", "transfer" and "exchange" following a deal between persons. One gains when the value of sales exceeds the original cost of the assets. On the other hand "profit" is when sale value of an asset is higher than the book value of the assets (WDV) sold at a particular date. "Capital assets" includes such assets that are permanent in nature having characteristics of generating income. Capital assets include land, building, machinery, shares and securities as referred in section 32(7) of the I. T. Ordinance 1984. Now, let us discuss such gains with reference to Tax Ordinance 1984. "Capital gains" is to be considered as separate source of income and to be taxed under the head "Capital Gains" with reference to section 20(f) of the I. T.
On the other hand "Business Income" is to be computed as per u/s 20(e) of the said Ordinance. From the viewpoint of "tax", "capital gains" is taxable specially at a rate as prescribed in the Second Schedule of the I. T. Ordinance 1984 for different categories of assessees.
In order to treat surplus amount realised from a transaction as capital gains there must be a transfer of ownership of capital assets by way of sales or exchange of capital assets from the assessee. The precondition should be kept in mind before a transaction of capital assets resulting gain. In order to compute such capital gains, in the tax Ordinance a separate head namely "Capital Gains" is also incorporated u/s 20(f) under main section 20- "head of income" for the purpose of computation of total income and charging of income tax. It is directed in this section that income should be classified and computed distinctly under different heads including gain from sale of capital Assets under the head "Capital Gains" u/s 20 (f) of the I. T. Ordinance 1984. Capital Gains and its computation for the purpose of charging tax is defined in section 31 and 32 of I. T. Ordinance 1984. Exemption is allowed to resident assessee u/s 32(7) only. Non-resident assessee is entitled to exemption provided similar exemption is allowed as tax free in the country where he/she is resident.
In this perspective, the government of Bangladesh is so generous and positive that in order to expand the activities of capital market and to augment the money supply, any profit and gain accrued from sales, transfer and exchange of shares and securities by an assessee have been declared to be fully exempted from tax if those shares and government securities of a company are listed on stock exchanges of the country.
To give relief to the assessee, a law is incorporated in the Tax Ordinance 1984 under sub-section 32(7) which reads as follows:
"32(7) Notwithstanding anything contained in this section or section 31, where a Capital Gains arises from the transfer of a capital assets being Govt. securities and stocks and shares of public companies listed with a Stock Exchange in Bangladesh, then no tax shall be charged under section 31".
From the above sub-section, we find that in order to get exemption there should be a capital Gains resulted from transfer of such capital assets.
Unquestionably as it is evident from the above sub-section (7) of section 32 gain arising from sale of shares and government securities are fully exempted for resident and non-resident assessee. Under this definition, an assessee is required only to fulfill the conditions as expressed in this sub-section i.e. shares and securities should have the nature of capital assets being publicly traded and the assessee should be considered in the light of definition as given in section 2(7) of the I. T. There is apparently a clear cut demarcation in the tax Law having no ambiguity in the definition to claim such exemptions by any assessee.
But surprisingly the tax officials are always found to be of negative attitude in accepting the profit and gains from the sales of shares and securities as tax exempted income, rather they are found rampant in taxing such income defying the section 32(7) nakedly. Although such exemption are being allowed to some individual assesses, but banks and financial institutions are being deprived of the said exemption on different grounds put forward by the assessing officer.
According to tax officials, shares and securities are not the capital assets although under sub-section 32(7) of the I. T. Ordinance 1984, stock and shares have been defined as capital assets.
Companies are not entitled to enjoy exemption under section 32(7), only the individuals are so entitled. But the tax officials can not show any material evidence in support of their claim.
Some tribunal members also admitted shares and securities as capital assets but they were reluctant to allow exemptions to assessee. Even after transfer of the appeal to a third member for his opinion no positive result could be achieved only because of their indifference to comply with the section 32(7) of the I. T. Ordinance 1984.
Sometimes, appeal authorities accept the claim of capital Gains as tax-free under section 32(7) for a particular assessee while in other cases, it is rejected for different reasons in violation of the enacted law.
Diminution in the value of shares is also being rejected by the tax authority being capital loss but added as revenue income for charging tax. Such illogical behaviour of the Appellate authority needs to be addressed immediately by the NBR in order to stop harassment of the assessee for undue and unjust taxation. Most of the disputes have been transferred to the High Court for a clear cut decision despite the fact that there exists section 32(7). Consequently, collection of tax revenue is being obstructed and the very intention of the government with regards to capital market is being frustrated.
Mobilisation of internal resources by the government is not upto the mark and it is facing difficulties to pursue its development activities. Foreign direct investment is much below the desired level, which is mostly induced by the pattern of taxation policy of gains from sale of shares and securities.
Under such circumstances, suitable amendments to the tax law regarding taxation on the capital Gains have become utmost necessity.
It is true that the generous policy of the government remains largely ineffective due to activities of the shortsighted tax officials, and tax officials have no right to distort the law to serve their own purpose. They have no right to undermine the democratic government of the country by twisting section 32(7) of Income Tax Ordinance 1984. National Board of Revenue should come forward to salvage the image of the government and the country by issuing necessary instructions to remove confusion and doubt of the assessees and the investors.
The writer is an FCA and senior audit and tax partner of Howladar Yunus & Co Chartered Accountants. He can be reached at e-mail: hyc@howladaryunus.com
Is the gain/profit on sale of shares and securities subjected to income tax under prevalent tax law of the country? When the transactions of "capital assets can be termed as business income in place of "capital gains"? When the question of "capital gains" out of any transactions relating to capital assets arises?
It is "gain" when a "capital asset" is transferred to and from any person by way of "sales", "transfer" and "exchange" following a deal between persons. One gains when the value of sales exceeds the original cost of the assets. On the other hand "profit" is when sale value of an asset is higher than the book value of the assets (WDV) sold at a particular date. "Capital assets" includes such assets that are permanent in nature having characteristics of generating income. Capital assets include land, building, machinery, shares and securities as referred in section 32(7) of the I. T. Ordinance 1984. Now, let us discuss such gains with reference to Tax Ordinance 1984. "Capital gains" is to be considered as separate source of income and to be taxed under the head "Capital Gains" with reference to section 20(f) of the I. T.
On the other hand "Business Income" is to be computed as per u/s 20(e) of the said Ordinance. From the viewpoint of "tax", "capital gains" is taxable specially at a rate as prescribed in the Second Schedule of the I. T. Ordinance 1984 for different categories of assessees.
In order to treat surplus amount realised from a transaction as capital gains there must be a transfer of ownership of capital assets by way of sales or exchange of capital assets from the assessee. The precondition should be kept in mind before a transaction of capital assets resulting gain. In order to compute such capital gains, in the tax Ordinance a separate head namely "Capital Gains" is also incorporated u/s 20(f) under main section 20- "head of income" for the purpose of computation of total income and charging of income tax. It is directed in this section that income should be classified and computed distinctly under different heads including gain from sale of capital Assets under the head "Capital Gains" u/s 20 (f) of the I. T. Ordinance 1984. Capital Gains and its computation for the purpose of charging tax is defined in section 31 and 32 of I. T. Ordinance 1984. Exemption is allowed to resident assessee u/s 32(7) only. Non-resident assessee is entitled to exemption provided similar exemption is allowed as tax free in the country where he/she is resident.
In this perspective, the government of Bangladesh is so generous and positive that in order to expand the activities of capital market and to augment the money supply, any profit and gain accrued from sales, transfer and exchange of shares and securities by an assessee have been declared to be fully exempted from tax if those shares and government securities of a company are listed on stock exchanges of the country.
To give relief to the assessee, a law is incorporated in the Tax Ordinance 1984 under sub-section 32(7) which reads as follows:
"32(7) Notwithstanding anything contained in this section or section 31, where a Capital Gains arises from the transfer of a capital assets being Govt. securities and stocks and shares of public companies listed with a Stock Exchange in Bangladesh, then no tax shall be charged under section 31".
From the above sub-section, we find that in order to get exemption there should be a capital Gains resulted from transfer of such capital assets.
Unquestionably as it is evident from the above sub-section (7) of section 32 gain arising from sale of shares and government securities are fully exempted for resident and non-resident assessee. Under this definition, an assessee is required only to fulfill the conditions as expressed in this sub-section i.e. shares and securities should have the nature of capital assets being publicly traded and the assessee should be considered in the light of definition as given in section 2(7) of the I. T. There is apparently a clear cut demarcation in the tax Law having no ambiguity in the definition to claim such exemptions by any assessee.
But surprisingly the tax officials are always found to be of negative attitude in accepting the profit and gains from the sales of shares and securities as tax exempted income, rather they are found rampant in taxing such income defying the section 32(7) nakedly. Although such exemption are being allowed to some individual assesses, but banks and financial institutions are being deprived of the said exemption on different grounds put forward by the assessing officer.
According to tax officials, shares and securities are not the capital assets although under sub-section 32(7) of the I. T. Ordinance 1984, stock and shares have been defined as capital assets.
Companies are not entitled to enjoy exemption under section 32(7), only the individuals are so entitled. But the tax officials can not show any material evidence in support of their claim.
Some tribunal members also admitted shares and securities as capital assets but they were reluctant to allow exemptions to assessee. Even after transfer of the appeal to a third member for his opinion no positive result could be achieved only because of their indifference to comply with the section 32(7) of the I. T. Ordinance 1984.
Sometimes, appeal authorities accept the claim of capital Gains as tax-free under section 32(7) for a particular assessee while in other cases, it is rejected for different reasons in violation of the enacted law.
Diminution in the value of shares is also being rejected by the tax authority being capital loss but added as revenue income for charging tax. Such illogical behaviour of the Appellate authority needs to be addressed immediately by the NBR in order to stop harassment of the assessee for undue and unjust taxation. Most of the disputes have been transferred to the High Court for a clear cut decision despite the fact that there exists section 32(7). Consequently, collection of tax revenue is being obstructed and the very intention of the government with regards to capital market is being frustrated.
Mobilisation of internal resources by the government is not upto the mark and it is facing difficulties to pursue its development activities. Foreign direct investment is much below the desired level, which is mostly induced by the pattern of taxation policy of gains from sale of shares and securities.
Under such circumstances, suitable amendments to the tax law regarding taxation on the capital Gains have become utmost necessity.
It is true that the generous policy of the government remains largely ineffective due to activities of the shortsighted tax officials, and tax officials have no right to distort the law to serve their own purpose. They have no right to undermine the democratic government of the country by twisting section 32(7) of Income Tax Ordinance 1984. National Board of Revenue should come forward to salvage the image of the government and the country by issuing necessary instructions to remove confusion and doubt of the assessees and the investors.
The writer is an FCA and senior audit and tax partner of Howladar Yunus & Co Chartered Accountants. He can be reached at e-mail: hyc@howladaryunus.com