As the 2015-16 national budget is being prepared, it is hoped the interests of thousands of small investors will be taken note of. These investors, virtually made paupers in 2010 but somehow remaining still with the market, deserve attention of the National Board of Revenue and the Ministry of Finance.
Since 2010, the stock market limped, never stood up and only occasionally tried to glitter. But such glittering was short-lived. Every time the market made a nosedive by shedding more points than investors could have believed. The investors simply became more frustrated and came to believe that the market would never look up. Many investors already closed their beneficiary owners (BO) accounts and deserted the market.
A large number of investors, who were active until a year back, are no more active. The market is being supplied with stocks through initial public offerings (IPOs) whereas the number of investors dwindled. Also the big investors like banks and merchant banks trimmed their portfolios as per the Bangladesh Bank's directives. The interest rates, especially term deposit rates, went up significantly since July 2010, and remained at high levels till last year.
Only in recent months, the term interest rates started coming down, that also because of a frustrating situation in investment demand. The Bangladesh Bank (BB) should have pursued a liberal money supply policy. But it did not and the tight monetary policy pursued kept the interest rates high so long. Now the condition in investment demand is so awful that it is no longer a monetary phenomenon or related that much to interest rates.
The stalemate in investment is now a political issue. Unless the acrimonious politics gives way to a peaceful practice of democracy, the investment scenario would not improve. However, interest rates that went up after July 2010 remained high in the subsequent years because of the BB's tight monetary policy in the name of containing inflation. It took a heavy toll on the stock market's interest. Investors saw alternative markets with their investible funds. They took money out of the stock market and deposited the same with the commercial banks. Stock market could not compete with the banks in terms of offering the investors the competitive yield rates.
There was another reason why money continued to make an outward journey from the stock market. This was because though banks' interest rates came down, the yield rates of the government's savings certificates remained high at the levels fixed up when banks deposits rates were also high. Now the government is awash with money from the sales of saving certificates and does not know how to service the increasing debt liability originating from the sales of saving certificates.
Simple knowledge of economics says, the government has to bring down the saving certificates' interest rates and keep the yield rate competitive with those of bank deposits. This measure, if taken, will serve the cause of stock market interest also. A percentage of money that is now invested in the saving certificates will come back again to the stock market.
For years students are taught what type of investment is a close substitute to that of in the stock market. The expected answer is investment in term deposits in banks and the government's savings instruments. These investments compete for the same fund which might have had made way to the stock market. It is an accepted theory. The market interest rates are inversely related to the stocks' prices.
The gap in terms of corporate tax was 10 per cent in favour of listed companies before 2013-14, but to everyone's surprise, the difference was brought down to the present level of 7.5 per cent through last year's budget proposals. In some cases, this tax was pushed up. For example, the Grameen Phone on listing with the DSE in 2009 was paying 35 per cent or 10 per cent less than the other mobile phone operators. But the Finance Bill of the FY 2012-2013 narrowed down that gap to only 5 per cent for the listed and non-listed mobile operators.
Once a tax advantage is given to a company, especially for going public, the advantage should not have been taken back. This type of reverse decision also hurts the interest of investing public in the stock market. Our suggestion is that the gap of 10 per cent corporate income tax favouring the listed companies be restored again.
Capital gain from individuals' investment is still being kept tax-free consciously by the government. The other issue which matters more in this case is the tax rates on companies' incomes. Corporate income taxes are higher in Bangladesh compared with those in many other countries including some economies in our neighborhood.
Recently, India announced a big cut in corporate tax, targeting it to be brought down to 25 per cent over the next few years. Bangladesh has multiple corporate income tax rates, the highest being 42.5 per cent for banks and the lowest rate 27.5 per cent being paid by other listed companies, which of course exclude mobile phone and tobacco companies.
Let the economy be made competitive at least in terms of corporate income taxes. Any reduction or concessions in the corporate income tax would help investment and in turn will also help the cause of investing public in the stock market. At present, income tax on dividend income is assessed at par, with other incomes from other sources like salary and rentals.
But as the companies are paying corporate income tax which, in other words, means in practice equity holders or stock investors are paying the tax, the dividend incomes received by the investors deserve a lower income tax. All dividend incomes received by all individual investors can be asked to pay tax at 15 per cent instead of the highest 25 per cent.
The writer is Professor of Economics, University of Dhaka,
email: abuahmedecon@yahoo.com
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