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Capital gain tax will go up to 30pc

MOHAMMAD MUFAZZAL | June 07, 2024 00:00:00

Individual investors are going to be subject to scrutiny of their beneficiary owner's (BO) accounts by the revenue authority for the first time ever for capital gain tax for FY25.

According to the proposed budget unveiled by the finance minister in parliament on Thursday, a person will have to pay tax if his/her capital gains in their portfolios exceed Tk 5 million.

The tax rate will vary depending on whether the investor kept the holdings for more than five years or not.

If an individual earns more than the threshold after holding onto their shares for more than five years, they will pay 15 per cent tax on the additional amount earned. The time condition has been attached to encourage long term investments in the capital market.

If the share holding duration is less than 5 years, the tax rate will be determined by the tax slabs fixed for individual taxpayers.

For example, if someone's yearly income is Tk 10 million and earns another Tk 10 million in the form of capital gains from selling securities in the secondary market, tax will be imposed on Tk 9.65 million (since tax-free income is Tk 0.35 million) plus capital gains worth Tk 5 million.

Having deducted Tk 0.35 million from the total income, the National Board of Revenue will impose 5 per cent tax on the additional Tk 0.1 million. The tax rate will be 10 per cent on the next Tk 0.4 million and 15 per cent on another Tk 0.5 million.

The tax rate will continue to rise to 20 per cent on the next Tk 0.5 million and 25 per cent on income up to Tk 2 million beyond the previous level. The maximum tax rate is 30 per cent for the income surpassing the previous slabs.

Capital gains will be incorporated into income from other sources to decide the tax rate.

The proposed capital gain tax will be applied to net income, meaning losses will be deducted from earnings on which tax will be paid.

Market operators say the tax will be applicable for high net worth individuals with portfolios of significant sizes.

For an instance, an individual investor will be eligible to pay capital gain tax if he makes more than 10 per cent profit from investments worth Tk 50 million.

Individuals may pay higher than cos, sponsors

Md. Moniruzzaman, managing director of Prime Bank Securities, said the capital gain tax would hardly have any impact on general investors.

He, however, said investors might have to pay tax at a higher rate than companies and their sponsor-directors.

Enterprises and sponsor-directors are required to pay capital gain tax at a rate of 15 per cent and 10 per cent respectively.

But if capital gains of an individual investor are added with other income, the tax rate may go up to 30 per cent.

"The proposed tax on the capital gains is a bit discriminatory for individuals," said Md. Mahmudur Rahman, first assistant vice president of Prime Bank.

Preferring anonymity, another stock broker said high net worth individuals having multiple BO accounts were not familiar with such scrutiny of the tax authority. So, the move will elicit a psychological response.

Besides, investors will feel discriminated against. A company -- be listed or non-listed -- pays corporate tax on the bottom line profits whereas individual investors' cost of investments will not be taken into account in the case of capital gain tax, said the broker.

Challenges in implementation

Initially, the collection of capital gain tax will be a complicated job as neither the brokerage firms nor do investors keep track of dates of investments in different securities and their holding periods.

Mahmudur Rahman, of Prime Bank, said many other issues, such as stock dividends, would have to be considered as well in tax collection.

Software will have to be developed to help ease realisation of capital gain tax, he added.

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