Capital GainsHeads of Income

138

2 Important Questions:1. Geographical Source of Income2. Basis of Taxation

Deciding a Capital Gains case

Geographical Source of Income [S-101(13)]Heads of Income

139

Gain on disposal of shares of Resident Company shall be Pakistan Source Income

Capital Gains

Basis of TaxationHeads of Income

140

Accrual basis, as Gain / Loss is to be taxed in year of disposal[S-37(1)]

Capital Gains

Deciding a Capital Gains CaseHeads of Income

141

1. Capital Gains [S-37]2. Capital Gain on disposal of Securities [S-37A]3. Special provisions relating to Capital Gains tax [S-100B]4. Deduction of Losses from Capital Gains [S-38]5. Non Recognition Rule [S-79]6. 8th Schedule7. Rule 13A to 13P8. Liability in respect of security transactions [S-112]9. Advance Tax [S-147, 236C, 236K & 236W]

Capital Gains

Deciding a Capital Gains CaseHeads of Income

142

1. Capital Gains [S-37]Capital Gains

Capital Asset:Means “property of any kind held by person whether or not connected with business”Does not includei. Stock in tradeii. Depreciable assetiii. Intangiblesiv. movable property held for personal use by person or dependents excluding following:a. painting, sculpture, drawing or other work of artb. Jewelryc. rare manuscript, folio or bookd. postage stamp or first day covere. coin or medallionf. Antique [S-37(5)]

Capital Loss from disposal of these assets shall not be recognized, only capital gains will be recognized. [S-38(5)]

Capital Gain from disposal of immovable property shall be taxed as a separate block of income@ 1st Schedule, Part I, Division VIII [S-37(1A)]

Deciding a Capital Gains CaseHeads of Income

143

1. Capital Gains [S-37]Capital Gains

Gain on Capital Asset [S-37(2)]:Consideration

- CostGain/Loss X

(X)X

Cost shall not include:• expenses deductible under any other provision of Income Tax Ordinance• inadmissible deductions under section 21

[S-37(4)]FMV on date of acquisition shall be treated as cost in following cases:• gift, bequest, will• succession, inheritance, devolution• dissolution of AOP• liquidation of company

[S-37(4A)]Gain or Loss on disposal shall be recognized in year of disposal even if cash basis of accounting is being adopted. [S-37(1)]If capital asset is held for more than 1 yearThen 3/4th of capital gain will be taxable [S-37(3)]No loss on disposal shall be recognized if gain from such asset is not taxable [S-38(2)]

this provision is not applicable on disposal of following capital assets:• shares of public company• vouchers of PTC• Modaraba Certificates• Redeemable Capital

Deciding a Capital Gains CaseHeads of Income

144

2. Capital Gains on Securities [S-37A]Capital Gains

Security [S-37A(3)] :Means:• share of a public company• voucher of Pakistan Telecommunication Corporation• Modaraba Certificate• an instrument of redeemable capital• debt Securities• derivative products

Capital Gain from disposal of security shall be taxed as a separate block of income@ 1st Schedule, Part I, Division VII[S-37A(1)&(4)]Loss from securities shall besetoff only against gains from securities &shall not be carried forward to subsequent TY[S-37A(5)]

Corporate debt securityTerm Finance Certificates (TFCs), Sukuk Certificates (Sharia Compliant Bonds), Registered Bonds, Commercial Papers, Participation Term Certificates (PTCs) and all kinds of debt instruments issued by any Pakistani or foreign company or corporation registered in Pakistan [S-37A(3A)(a)]

Government debt securityTreasury Bills (T-bills), Federal Investment Bonds (FIBs), Pakistan Investment Bonds (PIBs), Foreign Currency Bonds, Government Papers, Municipal Bonds, Infrastructure Bonds and all kinds of debt instruments issued by Federal Government, Provincial Governments, Local Authorities and other statutory bodies [S-37A(3A)(b)]

This section is not applicable onBanking Co & Insurance Co[S-37A(1)]

Deciding a Capital Gains CaseHeads of Income

145

3. Special provisions relating to Capital Gains tax [S-100B]Capital Gains

Capital gains on disposal of listed securities and tax thereon, subject to section 37A, shall be determined in accordance withEighth Schedule This section is not applicable on following:• mutual fund• banking company• NBFC• insurance company• modaraba• company, in respect of debt securities only and • any other person notified by FBR

Deciding a Capital Gains CaseHeads of Income

146

4. Deduction of Losses from Capital Gains [S-38]Capital Gains

If Gains from capital asset are not taxableThen Losses from same asset shall not be allowed for setoff[S-38(2)]Loss on following assets shall not be recognized:(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. [S-38(5)]

Deciding a Capital Gains CaseHeads of Income

147

5. Non Recognition Rule [S-79]Capital Gains

No GAIN or LOSS shall arise on disposal to Resident Person in case of following transfers:a) between spouses under an agreement to live apartb) transmission of the asset to an executor or beneficiary on the death of a personc) gift d) compulsory acquisition of the asset under any law where the consideration received for the disposal is reinvested by the recipient in an asset of a like kind within one year of the disposale) by a company to its shareholders on its liquidationf) by an AOP to its members on its dissolution (where the assets are distributed to members in accordance with their interests in the capital of the AOP)

person acquiring the asset shall be treated as:• acquiring an asset of the same character as the person disposing of the asset; and • acquiring the asset for a cost equal to the cost of the asset for the person disposing of the asset at the time of the disposal

cost of a replacement asset cost of the asset disposed of amount by which any consideration given by the person for the replacement asset exceeds the consideration received by the person for the asset disposed of

Capital GainsHeads of Income

148

Under section 38(5)No loss to be recognized, only gains will be recognized

Security [S-37A] Others

Others

Personal UseImmoveable PropertyMoveable PropertyStock in tradeDepreciable assetIntangibles

Non Recognition Rule [S-79]:In following cases, if asset is transferred to Resident Person, then No gain/loss shall arise:i. between spouses under agreement to live apartii. transmission on deathiii. Giftiv. to shareholder on liquidation of companyv. to members of AOP on its dissolutionvi. compulsory acquisition of asset under any law, when consideration is reinvested in asset of like kind within one year

Asset

Banking CoInsurance CoListed Security

Separate BlockTax @1st Sched, P-I, D-VIII

Separate BlockTax @1st Sched, P-I, D-VIIDisposalLossGain

Refer lossesHolding period > 1 yearNoYes

Fully taxable3/4th will be taxable

Capital Gains

Fully taxable in case of Banking Co/Insurance Co in respect of following:• shares of public company• vouchers of PTC• Modaraba Certificates• Redeemable Capital

Other than following:mutual fund, banking company, NBFC, insurance company, modaraba, company, in respect of debt securities only and any other person notified by FBRGain/loss calculation

As per 8th Sched

Un-listed Security