Tax waiver, regulatory reforms must to breathe new life into stocks: DBA

The DSE Brokers Association of Bangladesh (DBA) urged the government to delay imposing capital gain tax on individual investors for at least one year considering the disconcerting scenario of the market.

Even in doing so, the capital gain tax calculation has to be simplified, it said. The proposed FY25 budget suggests determining tax on the basis of shareholding duration; if an investor has held onto the assets for more than five year, the rate is 15 per cent, while if it is less than 5 years, the tax rate can go up to 30 per cent.

"We are not against the capital gain tax, but this is not the right time. It has engendered a negative sentiment among investors in the already bearish market," said Md Saiful Islam, president of the DBA at a post-budget press briefing held on Tuesday.

The DBA put forth its demands and asked the government to reconsider some of its key proposals, including formulating a roadmap for listing of state-owned entities, waiver of tax, for example on dividend income for new BO (beneficiary owner's) account holders; and a reduction in tax rate against commission income from share transactions by brokerage firms.

At a time when market intermediaries are struggling to retain investments, new tax measures are going to heighten pessimism about the market.

"In many cases, individuals will have to pay more than 40 per cent tax (capital gain tax plus wealth tax) as per the latest finance bill," said the DBA president.

Instead of making attempts to help the market recover from the perpetual decline, the budget proposed imposing capital gain tax on individual investors for the first time, applicable when profits exceed Tk 5 million.

The impact is already palpable as the prime index went down 168 points in just three days after the budget announcement.

The proposed budget has fixed the maximum personal tax at 30 per cent.

On the other hand, the corporate tax rate for non-listed firms (25 per cent to 45 per cent) is "lower than the individual tax rate, said Mr Islam.

Besides, the corporate tax rate gap between listed and non-listed companies has been reduced by 2.5 percentage points.

The DBA demanded that the corporate tax rate of non-listed firms be increased to more than the maximum tax rate for individuals.

"We are unable to keep investors in the market. Fifty per cent of market intermediaries have become unsustainable. If this trend continues, I don't know what the fate of our capital market will be in a year or two.

"We need policy support to recover from the situation," said Mr Islam.

Currently brokerage houses pay tax at two levels. Firstly, 0.05 per cent on sale and purchase of securities and secondly as corporate income tax, whichever is higher is considered the final tax.

The DBA chief pointed out three factors that contributed to the sense of gloom surrounding the stock market -- lack of transparency and accountability, lack of fundamentally strong companies in the market, and a confidence crisis among investors.

"If there are no investable stocks in the market, why would investors come to the market?" he said, adding that only 20-25 good companies were good performers in the present equity market.

Transparency is another big issue. "Most issuers' income statements and balance sheets lack transparency."

Moreover, margin loans have ballooned because of the aggressive borrowing by investors that the securities rules allowed. Now, both investors and lenders are trapped into irrecoverable debts.

"We need to review the margin rules. We also need to review the IPO rules so we can draw in good companies," said Mr Islam. Well-performing companies are not amenable to the existing public issue rules when it comes to fixing the price of IPO shares.

Demutualisation proved to be futile

The DBA demanded a review of the decade-old Stock Exchange Demutualisation Act, saying the reform measure failed to attain the goal of bringing transparency and accountability in the operations of the bourses as well as the stock market.

The move allowed seven independent directors to sit among 13 members, including chairman, on the board of the bourses. The separation of the bourses' ownership from the management was expected to bring back confidence in the market.

"But in a decade, the stock exchange has not seen any improvement," said the DBA president.

There are allegations that independent directors do not play their role in the meetings and remain inactive. There are even rumors that they participate only to collect board meeting fees, he said citing allegations of share manipulation by independent directors.

Roadmap for listing of SoEs

In the last decade, there has not been much progress in the listing of state-owned entities (SoEs) in the stock market though the matter has come up in discussions time and again.

There is no proposal in the budget for listing of the SoEs although the prime minister ahead of the budget directed the authorities concerned to take steps in this regard, said the DBA head.

"We request a roadmap for listing of state-owned enterprises deciding when and how many companies will be listed on the stock exchanges."

Capital loss to be carried forward

Since the FY23 budget, stock investors could secure tax benefits against capital loss. Capital loss reduces taxable income and any capital loss can be carried forward for six years, according to a provision introduced earlier.

But this year's budget document does not have anything mentioned about this, which may be taken advantage of by officials of the National Board Revenue.

"DBA wants a clarification about this so that investors continue to avail of the tax benefit."

Recovery from margin losses

Margin loss is a major barrier to market development. A large number of investment accounts have become inactive due to persistent margin losses, which have become severe in the last few years in the face of liquidity crunch.

"We request that margin losses be portrayed as tax deductible through an incentive to lenders to help them financially recover such investments."

[email protected]

[email protected]