The Pakistan Stock Exchange (PSX) has put forward a proposal for a flat Capital Gains Tax (CGT) rate of 5% to be applied across all derivative instruments traded on the exchange in its budget recommendations for the fiscal year 2025-26. This proposal encompasses both cash-settled derivative contracts and all futures contracts currently traded on the PSX platform.
In its detailed budget submission, the PSX emphasized the importance of aligning the CGT rate for derivatives with the existing 5% CGT that is currently levied on future commodity contracts traded at the Pakistan Mercantile Exchange (PMEX). The PSX strongly believes that establishing this tax parity will create a level playing field for all types of derivative products within Pakistan’s broader capital markets.
The PSX highlighted the current disparity in tax treatment, where gains from derivatives traded on the exchange are subjected to higher CGT rates, similar to those applied to traditional capital assets. According to the PSX, this lack of differentiation fails to adequately recognize the unique characteristics and inherently higher risks associated with trading in derivative instruments. Consequently, the existing tax structure acts as a disincentive for potential market participants, hinders innovation within the derivatives space, and ultimately impedes the overall growth and development of the domestic derivatives market.
The PSX further clarified that the proposed reduction in the CGT rate for derivatives is not anticipated to result in a significant revenue loss for the Federal Board of Revenue (FBR). The exchange pointed out that many of the available derivative products are currently either inactive or are still in the pre-launch phase. The PSX also noted that a similar tax incentive was previously a part of the Income Tax Ordinance until the year 2020 for cash-settled futures contracts but was allowed to lapse due to its inherently time-bound nature.
Drawing attention to international best practices, the PSX highlighted that numerous stock exchanges across the globe offer significantly lower or even zero CGT on derivative transactions. As a prime example, the PMEX in Pakistan currently applies a 5% CGT on its commodity futures contracts, while Borsa Istanbul in Turkey imposes no CGT whatsoever on derivative trading. The PSX argued that adopting similar incentive-based tax policies would effectively align Pakistan’s tax framework with prevailing global standards and have the potential to attract a greater influx of both domestic and international investors to the market.
Moreover, the PSX underscored the fact that exchange-traded derivatives offer a demonstrably safer and more regulated alternative to the leveraged trading platforms that are currently utilized by some investors. The Securities and Exchange Commission of Pakistan (SECP), through its comprehensive Derivative Market Review Committee report in 2016, also explicitly recommended the gradual replacement of unregulated leveraged products with regulated exchange-traded derivative instruments. This recommendation aligns with the broader objectives outlined in the Asian Development Bank’s Capital Market Development Plan for 2020–2027, which has been formally endorsed by the Ministry of Finance.
By advocating for a unified and reduced CGT rate of 5% across all derivative instruments traded on the PSX, the exchange aims to significantly stimulate market participation, attract a wider base of both foreign and local investors, and ultimately foster the long-term and sustainable growth of Pakistan’s financial markets. The PSX reiterated its firm belief that a consistent and unified CGT policy is absolutely vital for the healthy evolution and maturation of Pakistan’s capital and derivatives markets.
