Govt Likely to Increase Capital Gains Tax

The federal government is expected to increase the capital gains tax (CGT) in the FY26 federal budget. While the increase has not been confirmed, CGT and dividend income may face higher rates if the tax on income from debt instruments rises from 15 percent to 17-18 percent, according to Topline Securities. CGT and dividend income are currently under the full and final tax regime, and any shift to the normal tax regime would be viewed negatively by the market. The Pakistan Stock Exchange (PSX) has proposed a cut in CGT on derivative and futures contracts from the current 15 percent to 5 percent, aligning it with rates on commodity futures traded on PMEX. However, approval of this proposal is considered unlikely. PSX has also called for the removal of the 10 percent tax on bonus shares imposed in FY24, arguing it discourages companies from issuing bonus shares. The government’s decision on this remains uncertain. There is a possibility of rationalization of the super tax, which could support listed company earnings. PSX has also proposed a permanent 20 percent tax credit for companies maintaining a 25 percent minimum free float, but this is seen as unlikely to be accepted. PSX has asked for a restoration of the exemption on inter-corporate dividends within group companies. However, the government is expected to maintain the existing tax. The exchange has also recommended abolishing the minimum turnover tax of 1.25 percent for listed firms, but no change is anticipated. Other potential tax measures include: Despite these proposals, Topline said the FY26 budget could be broadly neutral for the market in the short term. Over the long term, alignment with IMF guidelines is expected to support sentiment. The market is currently trading at a 2026E PE of 5.3x, compared to a historical average of 7x. Topline maintains a base-case KSE-100 Index target of 127,000 by December 2025, with potential to exceed 150,000 if the IMF review in September proceeds smoothly.