No good news for stock investors

Contrary to expectations of the investing public in the stock market, the budget for the FY 2017-2018 contains no good news for them. The finance minister, however, talked about some reforms in the market.
Stock investors did expect some concrete measures in the budget proposals to infuse life in the otherwise dull stock market which were not there. During the run-up to the preparation of the budget,  the investors and other stakeholders suggested two steps to the Finance Minister to invigorate the present dull market. First, to reduce corporate income tax down to the level, at least, of the global average, if not below that and secondly, to grant tax exemption of dividend income received by individual investors up to Tk 1,00,000. These two demands were genuine when seen in the light of the present condition of the stock market and also when the government often promises to make it the main hub for businesses' long-term capital.
When the finance minister started reading out his budget speech, the stock investors were eagerly waiting to hear something good about their concerns, but at the end, they were frustrated and disillusioned. Whatever he said in his budget speech about the stock market was mostly repetition of what he had said last year on the same issue. The stock investors think this part of his speech reflects the views of the Bangladesh Securities and Exchange Commission (BSEC). Neither the small cap platform, as proposed by the finance minister, for trading of companies with small equity companies nor the clearing and settlement companies as proposed by the Dhaka Stock Exchange (DSE) can do anything good for the market even if they are put to operation.
The stock market investors will not be benefited unless the listed companies give good dividend and more quality stocks are listed on the bourses.  Creation of the  small cap trading platform and clearing and settlement companies was not the demand of the stock investors. These were rather the brainchild of some persons who have vested interest in the system. We do not understand how the above two measures, even if implemented, would help grow the stock market.
The problem of the present stock market is neither an absence of another trading platform nor another settlement company. The problem is a state of no-confidence from investors which could have been lessened by supplying them with stocks having good dividends. In this context, we suggested a reduction of corporate income tax for the listed companies and also the institution of a provision in the regulatory framework for further tax concession for companies offering dividends above a threshold level, say above 30 per cent. The provisions  of  reduction in the tax burden of the companies offering dividend above a pre-fixed level and a tax-free limit up to Tk 1,00,000 for individual investors, which were there in the past, were dropped by budget proposals  of last several years.
Now, there is no incentive in the system for the companies offering good dividends. Every listed company will receive the same treatment irrespective of whether they pay good or bad dividend or no dividend. The finance minister mentioned in this budget speech that global average corporate income tax is around or slightly higher than 24 per cent but unfortunately he did not propose to bring down the prevalent rate in the country, which is, on average, 33 per cent or more.
As for the corporate tax rate, Bangladesh has a few of them, the highest being 45 per cent and the lowest being 25 per cent for certain categories of the listed companies. When the global average is less than 25 per cent, Bangladesh does not have any good argument for keeping corporate income tax so high, much above the global average. There are many tax havens in the world with no tax or very low tax on businesses' profit. These tax havens very liberally attract global investment, including the so-called dirty money. Bangladesh is also losing a huge amount of money per annum on this account. For an economy like Bangladesh, in order to remain competitive globally, it should have reduced its tax rates long ago. A reduction in tax rates would have encouraged, to an extent, rich Bangladeshis to keep their money at home and also bring more FDI to the economy.
The finance minister himself admitted on several occasions the need for lowering of tax rates in the economy, but when the time came to act on that, he lost his zeal. High tax rates do not necessarily bring high revenues for the government. Sometimes just the reverse happens. When other global economies are in competition to reduce taxes of all kinds, Bangladesh is walking in the opposite direction. This will not help the country to have an investment above 30 per cent of gross domestic product (GDP) to achieve the targeted growth rate of 7.4 per cent or higher.
The Finance Minister also mentioned in his budget speech about the introduction of ETF (Exchange Traded Fund) as another new financial product. This is also an old idea. We have been hearing about it since last three years, but the product was not made real as yet. Even if the ETF comes on line, does anyone believe that it will help the present stock market pull out of the present bearish condition?

The writer is Professor of Economics University of Dhaka.
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