'Golden goose' and the proposal on capital gains tax

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Shamsul Huq Zahid
Only a day after Finance Minister AMA Muhith indicating the possibility of bringing an end to the tax-free status now being enjoyed by the country's capital market, apparel industry and migrant workers, the Dhaka Stock Exchange (DSE) last Monday came up with a firm proposal to levy 3.0 per cent tax on profits earned by banks, financial institutions and insurance companies from their investment in stocks.
Though the finance minister appeared not to be clearly decided on the issue, the DSE has submitted a straightforward proposal on capital gains tax during a meeting between its leaders and the top officials of the National Board of Revenue (NBR) last Monday.
A capital gains tax is a tax levied on capital gains--- the profit earned through the sale of non-inventory assets purchased at lower prices. The most common capital gains are made from the sale of stocks, bonds, precious metals and property. Some countries have introduced this kind of tax and some have not.
"Market capitalization of the DSE has shot up to $34 billion from $3.2 billion six years back…but before taking any step we have to think whether we are killing the golden goose for getting the golden egg", Muhith told a gathering of tax officials, civil society members, experts and media personalities last Sunday.
The finance minister is actually in a catch-22 situation as far as the revenue earning is concerned. The government does need to beef up its tax revenue, which is one of the lowest in the region in proportionate to the country's gross domestic product (GDP). In the backdrop of continuous decline in the earning from import duty, the direct taxes remain to be the best option to achieve that objective.
In recent years, earning from income tax has recorded a rise and a major part of the same has come from the corporate sector. Among the institutional taxpayers, banks and telecom sector have been the major contributors because of the levying of the highest tax rate-42.5 per cent-on them.
The citing of the example of 'golden goose' by the finance minister could be the high rate of tax that the banks are paying already. He is aware of the fact that the imposition of fresh tax in whatever form on the banks might cause financial strains to the latter.
For the last couple of years a number of banks are deeply engaged in stock trading. The share of the institutional investors in stock market is now estimated at 60 per cent. The presence of a sizeable amount of excess liquidity in the banking sector prompted a good number of banks to invest in stock market. However, their investments until now have turned out to be very rewarding. A good number of banks earned hefty amounts of profits last year from their investment in stocks despite the fact the central bank, being advised by the International Monetary Fund (IMF), has asked the banks to be cautious because of the risk involved in their excessive exposure to the stock market.
Now will it be justified to levy 3.0 per cent capital gains tax on banks and other financial institutions that are being taxed at otherwise high rates? The banks would be extremely happy to pay the gains tax if the profit earned through stock trading is exempted from the payment of regular income tax at the end of every year.
The DSE proposals to impose 3.0 per cent gains tax and reduce the corporate tax to 40 per cent does hardly make any sense. If the proposals are implemented the government's net annual earning from the financial sector would decline.
The DSE proposal on capital gains tax has thus some potential to create confusions. It was quite all right for the bourse to request the government not to impose capital gains tax on individual investors for the greater interest of the market. But the proposal to levy gains tax at a particular rate on the earning of the banks and financial institutions was, possibly, not appropriate.
The government has the prerogative to impose tax at certain rates on any entity and individual in accordance with its fiscal strategy unveiled in the annual budget and the aggrieved organizations and individual have every right to request for the redress.
The DSE board, reportedly, approved the proposal on imposing gains tax on institutional investors. Does not it sound strange? How can the DSE adopt proposal on tax that would affect the interest of others? Is it within the DSE's limit to float the proposal on gains tax? Rather, a fair stand on its part, as many analysts do suggest, would have been its stance, opposing imposition of any capital gains tax for it would affect the major players of the market. Is the DSE then acting on its behalf or that of somebody else?