Computation of Capital Gain

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Taxation Management FIN 623

MODULE 9

LESSON 9.38

CAPITAL GAINS

Capital gain 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 under the

head "Capital gains".

Computation of Capital Gain

Capital gain shall be computed in accordance with following formula:

A-B

o A is the consideration received by the person on disposal of the capital asset

o B is the cost of the asset.

If capital asset has been held by a person for more than one year, the gain shall be considered as 3/4th of

total capital gain derived on disposal of capital asset.

Example:

Say capital gain is Rs 100,000, if the capital asset is disposed of after retaining for more than one year, then

gain chargeable to tax would be as under:

100,000 x ¾ = Rs 75,000

No amount shall be included in the cost of the capital asset (B as outlined in the formula) for any

expenditure incurred by a person where, a capital asset becomes the property of the person as outlined

below:

a) Under a gift 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.

Deductions of losses in computing the amount chargeable under the head "Capital Gains" sec 38

Deductions shall be allowed under sec 38 for any loss on the disposal of a capital asset by the person in the

year.

No loss shall be recognized under this ordinance on the disposal of the following capital assets:

A painting, sculpture, drawing or other work of art

Jewelry

A rare manuscript, folio or book

A postage stamp

A coin or medallion or

An antique

`Capital Asset' means property of any kind held by a tax payer, whether or not connected with business

but does not include the following:

Assets Excluded From the Definition of "Capital Asset"

Any stock-in-trade (not being stocks and shares), consumable stores or raw materials held for the

purpose of business.

Any property with respect to which the person is entitled to a depreciation deduction under section 22

or amortization deduction under section 24;

Any immovable property; or

Any movable property (excluding capital assets specified in sub section (5) of section 38) held for

personal use by the person or any member of the person's family dependent on the person.

"Capital Assets" Include among others the following:

Movable assets.

Immovable Assets (excluding Immoveable Property)

Tangible Assets

Intangible Assets etc

Share of partner/member in a firm or AOP (in this ordinance even firms are treated as AOP)

Taxation Management FIN 623

Mining rights

Industrial licenses & import/export licenses acquired for consideration

Tenancy right or leasehold rights

Foreign currency

Right to subscribe for shares

The contractual right of a purchaser to obtain title to an immovable property

A license to manufacture certain product or render any services (know as franchise)

Goodwill for which payment has been made. Self-created goodwill does not come into the ambit of

chargeability under this head.

All precious metals, gems, stones, antique pieces and Jewelry which are not held by the assessee for his

family members dependent on him. This includes gold and silver coins, art collections etc

Term Disposal Defined:

(Section 2(8) read with section 75)

Some Examples of Disposal:

i) Transfer of capital asset by a subsidiary company to a parent company or vice versa

ii) Any transfer, in a scheme of amalgamation, or a capital asset by the amalgamating company to the

amalgamated company.

iii) Transfer of share by a share holder in a scheme of amalgamation of companies.

iv) Any transfer of a capital asset by a wholly-owned subsidiary company to its Pakistani holding company.

v) Any transfer of capital asset being any work of art, archaeological, scientific nature or art collection,

book, manuscript, drawing, painting, photograph or paint, to the Government or a University or the

National Museums, National Art Gallery, National Archives or any other such public museum or

institution.

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