Profit from pre-IPO share sales taxed

The government has imposed a 5 percent tax on profits from sales of shares or mutual fund units that an investor receives through pre-IPO placement.
Companies raise capital through pre-IPO placement, before going for an initial public offering. Many sponsors and individual placement holders make hefty profits by selling the placement shares or mutual fund units after the lock-in period.
The levy on placement holders is tagged with the provision of tax sponsor shareholders or directors of listed companies, according to a letter that the National Board of Revenue (NBR) has recently sent to the Securities and Exchange Commission.
The provision read that a 5 percent tax at source has been imposed on the profit made by sponsor shareholders or directors or placement holders from the sales of their shares or mutual fund units.
The NBR also asked the stockmarket regulator to collect the tax from the sponsor shareholders or directors or placement holders, officials said.
The SEC said it is now trying to find ways of collecting the tax.
"Till date, only the sponsor shareholders or directors are required to make earlier announcements for share sale. But now, the placement holders may also be required to make earlier announcements for share or fund unit sale, so that the amount of profit made can be identified," said Ziaul Haque Khondker, chairman of SEC.
The finance minister in his budget speech said only the sponsor shareholders or directors of listed companies would be brought under the tax net. But the provision of tax on placement holders has been kept in the finance bill.
A portion of the initial public offer is placed with private investors right before the IPO is scheduled to hit the market. The investors will be able to sell the shares at a higher price after the lock-in period attached to the placement. This is how they make profits.