Likely effect of proposed capital gain tax

As with every proposed budget, any raise or change in the tax regime elicits reactions both for and against it. When it comes to the issue of capital gains tax to be imposed on investors active in the bourses, certainly it will not be welcomed by either individual or corporate investors. The idea is that the government is going after the windfall profits being made by market manipulators, but implementing this plan carries with it a host of challenges.

The plan wants the national board of revenue (NBR) to look into the beneficiary owner's (BO) accounts to assess capital gain tax from financial year 2025. This is what has been proposed by the finance minister in the budget for the financial year (FY) 2024-25. The tax regime will change on condition of holding on to shares for more than 5 years. If a BO account holder keeps possession of said shares beyond 5 years and where the investor concerned earns more than the threshold amount, then s/he will pay a rate of 15 per cent tax on the additional amount. The idea naturally is to encourage less spot trading based on insider knowledge and bring stability to the bourses by encouraging people to hold on to their shares in the market. While the finance ministry may believe this to be workable, market insiders have differing views on whether this is the right time to tax further the investors who are few in numbers these days. The hyper or sustained inflation in everything from food, utilities to transport; depreciation of Taka and the increase in the prices of all inputs have resulted in price increases of all finished goods - these factors have already sapped people's incomes. The stock market is one place where people have been engaged in an effort to make some extra money. True that the bourses suffer from serious flaws that allow for repeat scams. While the big fish gets away with literal murder, small investors may shy away from the market if these measures are made mandatory.

Because the manner in which this has been proposed is going to act a serious dampener for current and probable individual investors. If a tax holder has a yearly income of Tk10 million and that person earns a further Tk10 million as capital gain from the sale of share / securities in the secondary market, tax incidence will balloon, as the individual will have to pay twice! First, tax will be paid on the regular income and separately for earnings involving sale of shares using the same income tax slabs. Indeed, individual investors may end up paying more than companies and sponsors which may have a boomerang effect on the market as a whole.

It is understandable that authorities would like to have more control over the profits being generated in the bourses and tax them, but precisely how is NBR expected to monitor the millions of active BO accounts? This will require both the design of specialised software and training for a separate cadre of officials to operate, maintain and effectively tie the system to the existing regime to NBR's tax regime. Certainly, a tall order for the revenue authority to fulfill, especially at a time when it is in the process of digitising its systems. Reportedly, the job is more complicated than it looks as the brokerage firms do not keep detailed track of investments in different securities and their individual holding periods. Hence, this plan of action cannot become policy unless the necessary software is developed and brokerage houses adopt it in their daily operations. Instead of formulating a policy that is destined to fail, it would be more prudent to set a timeframe within which to develop and incorporate a software platform before thinking about capital gains tax from the stock market.