Gains tax likely on banks, FIs dealing in stocks

---

Doulot Akter Mala
The government is actively considering levying tax on capital gains of merchant banks, banks and financial institutions (FIs) from stock trading in the next financial year (2010-11) to boost its direct tax collection.
No such tax, however, is likely to be imposed on individual investors, sources said.
The National Board of Revenue (NBR) is also set to re-introduce property tax in the budget for upcoming fiscal that was scrapped in 1999-2000 fiscal.
Income tax wing of the NBR feels that capital gain tax and property tax would help the government to achieve the highest ever income tax target likely to be set for the next fiscal.
The government may set Tk 210 billion income tax collection target in the upcoming fiscal. The amount represents a 25 per cent increase over the original budgetary target set for the current fiscal.
The NBR high-ups recently held a meeting with the finance minister and revealed their plan on extending income tax base.
Commissioners heading different field offices of the NBR have proposed to extend tax net to new areas during a recent internal pre-budget review meeting of the NBR.
Field offices of the revenue board have proposed to amend the 32 (7) section of the Income Tax that has exempted all income earned from share transaction from payment of tax.
They have proposed continuation of the tax-exemption for individual taxpayers, but suggested imposition of the same on companies and financial institutions.
The NBR will not hurt small investors but it is actively considering imposition of capital gain tax at low rate on companies and merchant banks, said a top tax official.
NBR can collect a big chunk of revenue through the re-introduction of property tax and imposition of tax on capital gain, particularly on short-term gains, he said.
The board will give emphasis on collecting tax from the wealthy class of people, the official said.
The property taxes can be imposed on the people having more than one residence or land while capital gain tax on institutional investors of share market, said the official.
"Tax can be introduced on short-term capital gains to encourage long-term investment in the share market," said a study paper.
"In 2009 (January-December), it was estimated that total wealth creation (capital gains plus dividends) of all shareholders of listed companies in Bangladesh was roughly US$ 10 billion," said the paper prepared by an income tax expert on 'impacts of tax-free status for capital gains in Bangladesh.'
The free float (owners who can trade their shares without restrictions) of Bangladesh market is roughly around 30 per cent, the paper said.
"Total wealth creation of investors who represent the free float was roughly $3.0 billion or Tk 210 billion in 2009. If this capital gain had been taxed at a flat rate of 10 per cent, then the government would have earned revenue worth Tk 21 billion," it said.
Tax-free status on all capital gains has affected the real sector investment as all investors, specially banks, have much interest in making investment in the capital market rather than in real sectors of the economy, the paper said.
Exemption on capital gain tax also encourages short-term speculative investments by the investors in the secondary stock market, it said.
Neighbouring countries including India and Pakistan have tax on capital gains at varying rates, the paper said.
In India, the tax on short-term capital gains on listed companies is 15 per cent while long-term gains enjoy tax exemption. For unlisted companies, short-term capital gain tax is 30 per cent while it is 20 per cent for long-term capital gain.
The study paper has recommended reduction of tax on dividend income to encourage companies to declare dividends to the long-term investors.
"The total tax exemption limit of dividend income should be doubled and the additional dividend income above the exemption level should be taxed at a flat rate of 20 per cent for corporate and 15 per cent for individuals," the expert recommended in the paper.
Talking to the FE, former president of Dhaka Stock Exchange (DSE) Rakibur Rahman strongly opposed any move to impose tax on short or long-term capital gain.
On capital gain tax in the neigbouring countries, he said country's share market needs at least ten years to be as strong as the Indian capital market.