By Adil A Ghaffar (General Secretary of PSX Stockbrokers Association)


1) Change in Definition of the term “Security” by Honorable Sindh High Court

In the case of Khalid Mansoor vs FBR and three others (2016 PTD 1813) a Division Bench of Sindh High Court, in its judgment dated 4th March, 2016, while interpreting section 37A of the Income Tax Ordinance, 2001 (Ordinance) HELD that:

shares of the company must be a “security” for the entire “holding period”. In other words, the relevant instrument must be

a “security” on the date on which it was acquired, and

a “security” on the date on which it is disposed of.

Both of these conditions must be met and applicable for the charge to be complete.

Since “security” has a specific meaning for purposes of section 37A, this means that the instrument in question must be a “Security”, as defined, on both the dates. As presently relevant, this meant that the shares of the company ought to have been listed on a Stock Exchange on the date on which the petitioner acquired the same and the date on which he disposed them off.

Both of these conditions had to be met for there to be a “holding period” with in the meaning of sub-section (2) and, therefore, a valid levy in terms of section 37A.

In our view this conclusion follows necessarily from the relevant principles of interpretation.

Sub-section (2) has to be read and applied literally, and the “holding period” determined accordingly.

The term “security” as used therein can only have, and be given, its defined meaning.

Perusal of Para 2 and later part of the judgment would show that Counsels of respondents could not assist the Court in a proper manner.

They appeared un-aware of the intricate issues of Law and Rules involved in the matter. FBR also erred in not going in appeal against the said order which was so damaging for the Corporate World, Stock Exchanges and for its own self.


2) Impact of the SHC Judgment on implementation of Section 37A

As long as the Sindh High Court judgment / order is in field NCCPL / FBR will not be able to invoke Section 37A where a share was acquired before the Company got itself listed on the Exchange.

For an unlisted company to get listed has to sell about 25% of its shares through IPO to General Public. It is interesting to note that the sale / purchase of shares in IPO is complete before the Exchange declares that company is “Listed”.

The corollary of this situation is that shares purchased in IPO ought not be allowed to be traded on the Exchange because, under the law, only “securities” could be traded on the Stock Exchange.

As a precondition for listing, an unlisted company has to sell about 25% of its shares in IPO. The balance 75% of the shares are left with Issuers / Sponsors of the said company.

If interpretation of SHC is accepted, even after declaration of “listing” all the shares in the hands of the acquirers through IPO stay as shares because these were acquired when the company was still unlisted.

Similarly the shares held by Issuers and Sponsors would also stay as shares (rather than securities) because these were acquired by them when the company was unlisted.

NCCPL and CDC would be required to maintain record, separately for “shares” of a company acquired prior to its listing and of “securities” acquired after its listing.

Actually, the situation would emerge so, that in view of date of acquisition being prior to listing, no share, ever, shall be able to attain the status of a “security”. Stock Exchange shall come to halt. No company shall be able to get it self listed and FBR’s revenue from this source would be reduced drastically. In fact section 37A would become redundant.

NCCPL and FBR will have to refund the capital gain collected in respect of gain on sale of “shares” which had not attained the status of “securities” (in the eyes of the Sindh High Court) because the same had been acquired when the relevant company had not become a “public” (listed) company.


3) Definition of a Public Company / Listed Company

For Tax purposes, Income Tax Ordinance, 2001 has classified all companies in two categories: Public Company & Private Company. All companies that are not “Public” have been classified as “Private”.

The term “Listed Company” has not been defined in the Ordinance. So for a listed company, definition has to be inferred from definition of a “public company”, as given in Sec. 2(47)(b) of the Ordinance, 2001.

Relevant part of the said section is reproduced here.

Section 2 (47)(b)

Public Company means:

  1. b) a company whose shares were traded on a registered stock exchange in Pakistan at any time in the tax year and which remained listed on that exchange at the end of that year; or


4) Section 37A – Special Procedure for taxation of capital gain on disposal of Securities

Section 37A

Capital Gain on disposal of Securities

For taxation of gain on disposal of securities Income Tax Ordinance, 2001 has provided a special law and procedure in the form of section 37A, section 100B, Schedule 8 and detailed Income Tax Rules.

Section 37A(3)


This sub-section introduces the concept of “Security” in the Tax Law.

Ordinarily, shares of a company are called “Shares” but this sub-section states that for the purpose of section 37A shares of following companies would be called “Securities”.

Shares of a Public Company,

Vouchers of Pakistan Telecommunication Corporation, Modarba Certificates,

An instrument of redeemable capital,

Debt Securities and

Derivative Products

Section 37A (1A)

This sub-section lays down the Formula for computing the gain arising on disposal of a security, namely: A – B

Where “A” is the consideration received by the person on disposal of the security; and

“B” is the cost of acquisition of the security.

Section 37A (2)

The holding period of a security, for the purposes of Section 37A is to be reckoned from the date of acquisition to the date of disposal of such security.


5) Section 37A – As being applied by NCCPL / IRS Officers

5.1 Since inception of “37A” gain on disposal of securities is being computed and collected

(a) by National Clearing Company of Pakistan Ltd. and / or

(b) by Field Officers of FBR, on transactions, which escaped assessment by NCCPL, for the reason that the NCCPL had not yet assumed jurisdiction at the time, when the disposal of securities took place, such as shares sold in IPO etc. under the following law and procedure,

As soon as a company becomes a “Public Company” through listing on Stock Exchange in Pakistan, its shares become “securities” irrespective of the date of acquisition of those shares and irrespective of the fact that the company was unlisted at the time of acquisition of its shares.

For determination of “Holding Period”, the counting of days / period starts from the date of acquisition of those shares irrespective of the fact that the company was unlisted at the time of acquisition of those shares.

5.4 The law and procedure as being applied by tax authorities (including NCCPL) is amply clear from Rule 13P (zb) which is reproduced below.

Rule 13P (zb)    Sale transactions of securities of private / public un-listed company after its conversion into listed company.

Detail of the transaction

An investor, holding such securities sells securities in a stock exchange, the transaction is settled by transferring the securities sold from his account maintained in Central Depository System to the investor buying the securities with credit of sale proceeds to the account of investor disposing of the securities.


Tax treatment

Disposal of security is to be taken as taxable event, at settlement date, Capital gain will be computed by applying FIFO method. Capital Gain shall be chargeable to tax as per section 37A read with rates specified in Division VII of Part I of the First Schedule of the Income Tax Ordinance, 2001


A, being a client of a broker, has 1,000 shares of company ABC in his account. He acquired 1,000 shares on the 1st January, 2013 at Rs. 10 per share when the Company was private / public unlisted company having face value of shares of Rs. 10 and transfers the same in electronic form with CDC on 1st February, 2013. ABC Company listed on stock exchange on 1st July, 2015 at a listing price of Rs. 20. He disposed of 500 shares on 1st January, 2016 at Rs. 25 per share and 500 shares 8th February, 2017 at Rs. 30 per share.

NCCPL shall compute capital gain and tax thereon, if any in the following manners:

Date of acquisition will be based on CDS data while face value will be entered as cost of acquisition from ready board quotations:


Purchase / Acquisitions Disposal
Date No. of Shares Price Cost 1st Jan 2016 8th Feb 2017 Total
1-Jan-2013 1000 10 10000 500 500 1000
Selling price as per share 25 30
Sale proceed 12,500 15,000 27,500
Less: cost 5,000 5,000 10,000
Difference 7,500 10,000 17,500
Less: 0.5% of sale proceeds as expense 62.50 75 137.5
Capital gain 7,437.5 9925 17362.5
Holding Period 1,095 1,499
Tax rate applicable 7.5% 0%
Tax to be collected 557.81 Nil

In the above stated examples, Holding Period has been worked out as under;


Part sold on 01-Jan-2016


Particulars Date Holding Period Remarks
Acquired 1000 shares of ABC co. 01-01-2013 Nil ABC was un-listed at the time of acquisition of shares
From 01-01-2013 to 31-12-2013 365 days
From 01-01-2014 to 31-12-2014 365 days
From 01-01-2015 to 31-12-2015 365 days Listed on 01-07-2015
Shares sold as “securities” on 01-01-2016 Nil
Total Holding Period 1095 days


Part sold on 08-Feb-2017


Particulars Date Holding Period Remarks
Acquired 1000 shares of ABC co. 01-01-2013 Nil ABC was un-listed at the time of acquisition of shares
From 01-01-2013 to 31-12-2013 365 days
From 01-01-2014 to 31-12-2014 365 days
From 01-01-2015 to 31-12-2015 365 days Listed on 01-07-2015
From 01-01-2016 to 31-12-2016 365 days
Shares sold as “securities” on 08-02-2017 39 days
Total Holding Period 1499 days


It is evident from above that FBR interprets section 37A(3) in a manner that when a company gets listed, its all shares, including the shares that were acquired when the said company was unlisted, are treated as “securities” and counting of Holding Period starts from the date of acquisition of the shares, even though the company was unlisted at the time of acquisition of those shares.


6) How a Company gets listed on a Stock Exchange?


According to Income Tax Law and Regulations of Pakistan Stock Exchange, shares of an unlisted company are called “shares” while shares of a listed company are called “securities”

It also needs to be noted that Stock Exchanges deal in Securities only. A share of an unlisted company can neither be sold nor bought at a Stock Exchange. (Rule 5.2.1 of PSX Rule Book)

For a company to get listed on an Exchange has to follow the procedure laid down in chapter 5 of the Rule Book of Pakistan Stock Exchange. After meeting other formalities of Listing Process, an unlisted company has to offer about 25% of its shares to General Public for subscription. Such an offer is called Initial Public Offer (IPO). Issuers may offer such shares to public in following manners;

Direct subscription through application to issuers bankers

Book Building Process


Book Building

These days popular mode of IPO is through Book Building. This Process is used for price discovery of the shares offered. About 75% of the shares are sold through Book Building and the balance 25% shares are sold at the strike price through invitation of applications from public, in issuer’s banks.

As soon as buyers of shares (in IPO) are determined, the issuers send the shares to the accounts of buyers for which money had already been received by them. Although by that moment title in the shares gets transferred to the buyers but status of that company in the eye of law is still unlisted.


Declaration of status of a “Listed Company”

“The declaration that the applicant company stands listed on the Exchange” is made by the Exchange under Rule 5.2.1 (a) of the PSX Rule Book. This declaration is made when trading in shares sold in IPO is to be allowed on the Exchange. If following the order of Honorable SHC, only shares purchased after listing are to be treated as “securities” then even shares sold and purchased in IPO could not be allowed to be traded on the Exchange, because the same were acquired when the company was still “unlisted”.

It is evident from above that it is a “necessity of law” that the shares acquired when the company was still unlisted, be granted the status of a “security” as soon as the said unlisted company attains the status of a “Listed Company”, this grant of status of “security” has to be from the date preceding to, the declaration of a company as a Listed Company.

Once the principle enunciated as above is violated, shares of a Listed Company would never achieve the status of a “security”. Even shares sold / purchased in IPO can not be sold in the Exchange because at the time of acquisition the relevant company was still “unlisted”.

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