BSEC seeks 5-year tax holiday for IPOs with 30% free-float 

Infographic: TBS

To attract financially robust companies, the stock market regulator has proposed a five-year full corporate tax exemption for firms that will offload at least 30% of their shares on stock exchanges through initial public offerings (IPOs).

On 12 November, the Bangladesh Securities and Exchange Commission (BSEC), led by Chairman Khondoker Rashed Maqsood, submitted a proposal letter to the National Board of Revenue (NBR) and the Financial Institutions Division in this regard.

In the proposal, the BSEC outlined a three-tiered corporate tax exemption structure based on the percentage of shares offered to the capital market, applicable to all companies, including telecom firms. 

Under this plan, companies offloading at least 20% of shares would enjoy a reduced corporate tax rate of 12.5%. For companies with at least 10% free-float, the tax rate would be set at 15%.

Currently, listed companies are subject to a 22.5% corporate tax if they have offloaded more than 10% of their shares. However, this rate can be reduced to 20% if they meet certain bank transaction conditions. 

For companies that have offloaded up to 10% of their shares, the tax rate is 25%.

Rezaul Karim, spokesperson and executive director of the BSEC, told TBS that the new commission proposed the initiative to the revenue authority intending to list strong, fundamentally sound companies, both domestic and foreign, on the stock market.

In the letter, the BSEC said that the current capital market is primarily equity-dependent. The development of the market would gradually reduce reliance on bank financing and contribute to desired industrialisation through long-term investments.

The securities regulator noted that listing new companies and increasing share transactions in the capital market would generate new direct tax revenues, such as a 0.10% source tax, taxes on dividends, and capital gains. Unlisted companies, however, do not offer such opportunities.

The BSEC also pointed out that currently, large companies are raising relatively small funds through IPOs, resulting in smaller IPO sizes and limited public participation. This limited engagement leads to reduced trading activity in the market and, consequently, lower tax revenue from transactions.

The BSEC argued that if companies issue 30% or more of their shares in an IPO, public participation increases, leading to higher transactions in the secondary market. This boosts market liquidity and results in greater tax revenue for the government.

The regulator believes that offering tiered tax incentives to encourage the sale of a larger portion of shares in IPOs will benefit the capital market. Additionally, these tax exemptions will be offset through taxes collected at the source from transactions in the market.

Experts welcome the move 

Mazeda Khatun, president of the Bangladesh Merchant Bankers Association, told TBS, "The stock market is currently facing a shortage of strong companies. Therefore, the BSEC's proposal to offer tax incentives to attract such companies is highly timely." 

She added that if the proposal is implemented, it would encourage quality companies to enter the stock market.

Current tax rate gap between listed and non-listed firms

While listed companies are subject to the highest 25% corporate tax, non-listed companies face a 27.5% corporate tax rate, which can be lowered to 25% if they comply with specific bank transaction requirements.

Market stakeholders have consistently advocated for a wider corporate tax gap between listed and non-listed firms.

Meanwhile, listed mobile phone operators enjoy a 5% reduction in corporate tax, lowering it to 40% for listing. Banks, non-bank financial institutions (NBFIs), and insurance companies benefit from a 2.5% reduction, bringing their corporate tax rate to 37.5%.

Listing challenges faced by companies

In October, the BSEC chairman met with the Meghna Group Chairman Mostafa Kamal, City Group Managing Director Md Hasan, and PHP Group Director Mohammad Akhtar Parvez to discuss IPO listing challenges faced by companies.

In the meeting, Mostafa Kamal voiced concerns about the lengthy and cumbersome process of listing on the country's stock exchanges. He criticised the existing framework as too slow for growing businesses, stating, "Raising capital from the market takes two to three years. We cannot afford to wait that long." 

He described this situation as a bottleneck that discourages companies from pursuing initial public offerings (IPOs).

Kamal also suggested that greenfield start-ups should be allowed to raise funds from the capital market.

BSEC spokesperson said the commission intends to address the challenges step by step.