Rich individuals to walk away from stocks as high gain tax slapped
This has become a big concern for the market groups as such investors are the movers and shakers in the bourses
Imposing a tax on capital gains exceeding Tk50 lakh from listed securities is likely to drive away super-rich investors from the capital market, as they might face tax rates of over 40% on their capital gains, according to market insiders.
On Saturday, the parliament passed the Finance Bill 2024, imposing the capital gain tax amid criticism from the investors and the market analysts.
Combining the Finance Act 2024 and the Income Tax Act 2023, Chartered Accountant Snehasish Barua, a director at SMAC Advisory Services Ltd said, capital gains from assets held for more than 5 years is 15% for individuals and that from the assets held for a shorter period is subject to their regular income tax.
If a rich individual, who earns income from capital market only realises capital gains of over Tk68.5 lakh in the 2023-24 income year, will be taxed at a 25% rate and if his net worth exceeds Tk50 crore it will become 33.75% including the 35% surcharge, he added.
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"Next year, the highest surcharge-included rate may hit an extreme high of 40.5% for him if he realizes capital gains over Tk 88.5 lakh," he said.
This has become a big concern for the market groups as such investors are the movers and shakers in the bourses.
"This is a sudden punishment for the honest riches who eyed wealth creation alongside providing equity for the growing firms," said DSE Brokers Association President Saiful Islam, adding that, they will be desperately looking for alternatives when the capital market is in desperate need of more investment from the well-off.
The rich people who don't hide income or wealth, will be discouraged to invest at a time when the market could play a big role in financing the next wave of private sector-driven economic development, added Islam.
Most importantly, the tax rate went too high for big investors in the first year of imposition and ironically the market is bleeding due to the macroeconomic adversities, he further said.
Chartered Financial Analyst Moniruzzaman, also the managing director of Prime Bank Securities, told TBS gains are taxable in the civilised world and Bangladesh should not be an exception for decades. But, the high tax is going to beat that in the developed and developing world counterparts.
Also, the mandatory holding period for minimising gain tax is too long for stock investors here, if compared to that in the USA, India and most other peer markets, he added.
According to PWC Tax Summaries, individuals in India pay a highest 15% tax on their short term capital gains from the stock market and that came after their market had walked a long way.
The rate is 20% in markets like China, Japan and the USA, 30% in high tax countries like Sweden and 40% in troubled countries like Turkey, Uganda.
Standard holding period in most markets for minimising gain taxes is 12 to 36 months, which is still 60 months in Bangladesh.
"We expect rationalisation of the taxes and holding period for the capital market gains as it is a riskier option and a tough choice for investors," said Moniruzzaman.
The Income Tax Act 2023 made all income of the pass through capital market vehicles—mutual funds, alternative investment funds, real estate investment trusts and exchange traded funds—tax waived. However, eligible capital gains and income from such instruments will be taxed.
Sponsors, directors and placement shareholders of listed shares and funds will have to pay 10% source tax on their capital gains during selling and later their regular capital gain tax will be collected during tax return filing, said Md Abdul Kader Nabil, a brokerage professional also an income tax practitioner.
If sold after a five-year holding, their capital gain tax rate will be 15%, and selling earlier they will end up at their regular income tax slabs, if the National Board of Revenue does not come up with any supportive Statutory Regulatory Order soon.
Countries, including UAE and Saudi Arabia that are looking to develop their capital market made individuals' capital gain tax free, added Nabil.
