Amid burdensome taxes, undisclosed money to bring cheers to equity market

Any hope of the stock market emerging from the pit of despair has been dashed by all the fiscal measures considered by the government for the upcoming year to increase revenue.

One of the measures is to impose capital gain tax on individual investors in FY25.

At a time of rising interest rates, higher dollar-taka exchange rate, and low profitability of listed companies, the market has been experiencing an unabated outflow of cash. Even if some companies have successfully stayed on their growth trajectory in the adverse climate, investors are reluctant to put their money in those stocks.

The negative sentiment surrounding the market slimmed down the scope of making capital gains. In such a scenario, a 15 per cent tax is proposed for capital gains exceeding Tk 5 million.

Though an individual investor enjoying such a huge amount of capital gains from the existing market would be a rare thing to see, market stakeholders worry that the tax move would create unnecessary jittery among investors.

Apart from imposing capital gain tax, the government has planned to narrow the tax gap between listed and non-listed companies and increase tax on capital gains from share transfer by sponsor-directors of listed companies to 15 per cent from 5 per cent.

The new tax measures are being put in place instead of supportive measures or incentives to help the market revive.

The growing deposit rates in the banking sector and higher yields of Treasury bonds have already been driving away investors from stocks to fixed-income instruments.

The news of possible tax measures triggered a fresh round of sell-offs, dragging the Dhaka Stock Exchange's prime index down almost 6 per cent in May, turning the market as the worst performer among global markets.

The prime index lost more than 17 per cent or 1,112 points since the lifting of the floor price in January this year, sinking to a 38-month low. Stocks lost Tk 1.42 trillion in market value during the time.

Amid the doom and gloom, one positive thing is that individual investors will continue to enjoy tax rebates up to Tk 1 million, 15 per cent of investments made in listed securities out of their taxable annual income. They will be able to inject a maximum 20 per cent of their taxable income to enjoy the tax waiver.

Moreover, Treasury bonds trading on the stock exchanges are gaining popularity as the securities regulator paved the way for individual investors to buy T-bonds via brokers in the primary auctions.

A stronger secondary market of T-bonds offers an opportunity to diversify one's portfolio and offset risk of volatile stocks.

Meanwhile, there is a good chance that undisclosed money will be allowed into the stock market, subject to a payment of 15 per cent tax, without a question asked about the source of income. That is likely to increase liquidity flow into the market.

Narrow tax rate gap to discourage new listing

The National Board of Revenue (NBR) proposes reducing the tax rate gap between listed and non-listed companies, which, according to market experts, will discourage good companies from floating shares to the public.

It set to reduce corporate tax by 2.5 percentage point to 25 per cent for non-listed companies, subject to compliance with cash transaction limit, which would narrow the gap to 5 per cent from 7.5 per cent between non-listed companies and the companies that have floated shares worth more than 10 per cent of its paid-up capital.

A narrower gap, 2.5 per cent, is suggested between non-listed companies and listed firms that have free float equivalent to 10 per cent or less of the paid-up capital, given that the condition of cash transaction is met.

The condition entails that a single cash transaction does not exceed Tk 0.5 million and total cash transactions not more than Tk 3.6 million a year.

The stock market already lacks good companies. Only 15-20 companies have been able to attract foreign investments out of nearly 400 companies listed in the market.

Due to the scanty number of fundamentally strong companies, the scope for investment has remained thin, said Shahidul Islam, managing director of VIPB Asset Management, which manages mutual funds.

The DSE demanded a wider tax rate gap of at least 10 per cent to lure good companies into the market.

Significance of capital gain tax

At present, individual investors do not pay any capital gain tax.

The initiative aligns with International Monetary Fund (IMF) recommendations to enhance revenue collection and ensure fiscal discipline within the country's economic framework, according to finance ministry officials.

Recently, the DSE chairman said that around 90 per cent of the market's assets are held by institutions and sponsor-directors. They have already been paying 5 to 10 per cent tax on capital gains. The remaining 10 per cent are individual investors.

"The government may get an insignificant amount from capital gain tax from individual investors, but the psychological impact on the overall market is high," said Mir Ariful Islam, managing director of Sandhani Asset Management.

While the new tax measures will act against the equity market, the opportunity of legalising undisclosed money by investing in stocks, flats, lands etc. after a four-year break may bring cheers to the market.

Earlier in FY21, the government allowed investment of undisclosed money in exchange for a 10 per cent tax. A total of 11,839 people grabbed the opportunity to whiten Tk 205 billion in the fiscal year, the highest in history in a single year. The government received Tk 20.64 billion as tax.

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