History shows CGT hikes don’t scare investors: Report

June 06, 2024 (MLN): Pakistan stock market has plummeted 2.3%, or 1,764 points, over the past seven sessions amidst fears of an increase in Capital Gains Tax (CGT) or dividend tax. However, an analysis of past budget changes in CGT and dividend taxes indicates that market reactions to these changes have generally been insignificant.

According to a report by Topline Securities, PSX lost just 0.61% ten days post-budget announcement in fiscal year 2014-15.

To note, in FY15, the CGT rate was increased by 250bps to 12.5% from 10% for holding up to 12 months. Holding between 12- 24 months was taxed at 10%, and holding beyond 24 months was exempted.

The analysis further shows that PSX gained 1.5% ten days post-budget in fiscal year 2015-16. CGT was increased by 250bps to 15.0% for holding up to 12 months, 12.5% for holding between 12-24 months, 7.5% for holding between 2-4 years, and exempted holding above 4 years.

Moreover, in FY16, the dividend tax was increased by 250bps to 12.5%.

On the other hand, in the fiscal year 2017-18, market declined 6% post announcement of budget as this coincided with MSCI reclassification from frontier to emerging markets resulting in net outflow of $133 million in the months of May and Jun 2017 (budget announced on Jun 09, 2017). 

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