NBR weighs capital gain tax in stocks next year

The National Board of Revenue (NBR), in line with the International Monetary Fund (IMF) prescriptions, intends to tax profits or capital gains from stock market investments made by individual investors from the next fiscal year.

A senior NBR official, on condition of anonymity, told TBS that the Statutory Regulatory Order (SRO) dated 1 July 2015, which granted individual investors exemption from paying capital gains tax on listed stocks, mutual funds, bonds, and debentures, may be revoked by the end of this fiscal year.

If this policy is implemented, individuals may have to pay a 5%-25% tax against their capital market gains depending on their regular income tax slab.

However, sources within the NBR have indicated that the initial tax rate on capital gains from publicly traded securities for individual investors will be lower but investors may face progressively increasing taxes, although the specific structure has not been finalised.

For instance, capital gains from listed securities below a certain threshold might be exempt from taxation. Alternatively, investors selling securities below a specified threshold could be eligible for a tax exemption, similar to the system in place in India.

Additionally, there are plans to implement a holding period requirement under which capital gains from short-term trading of listed securities could be subject to higher taxes, said NBR officials who are closely examining examples from comparator countries.

In India, individual stock market investors are subject to a capital gains tax of 15% if they sell securities within the first year of purchase. This rate decreases to 10% if the holding period exceeds 12 months. Also, gains are only taxed on the proceeds exceeding 1 lakh rupees for individuals who demonstrate a holding period of over a year.

Institutional investors in India face capital gains taxes ranging from 15% to 40% for short-term trading, which decreases to a range of 10% to 20% for gains from long-term investments.

In Bangladesh, individuals have never been required to pay taxes on their capital gains from listed securities. During a mid-2010s attempt to impose taxes on individual investors' capital gains, the NBR encountered strong resistance and ultimately retreated.

Individuals are subject to a general capital gains tax of 15% in Bangladesh if the holding period exceeds five years. For shorter holding periods, the rate depends on the taxpayer's income tax slab. Conversely, companies must pay a flat capital gains tax rate of 15%, regardless of the holding period.

However, as an incentive for the sake of capital market development, companies, since July 2015, had to pay only 10% tax against their capital gains from listed shares and other securities while the rate is 5% for sponsor-directors or shareholders having a 10% or higher stake in listed firms.

Also, mutual funds that pull public money and professionally invest in listed securities are exempted from paying capital gain tax.  

Market experts express concerns

However, capital market professionals have expressed concerns regarding the potential removal of the waiver of individuals' tax on capital gains. They highlight that individual investors outnumber institutions in the country and their sentiment could further dampen the already bearish stock market.

Mohammad Ali, a chartered accountant and former vice president of the DSE Brokers Association of Bangladesh, told TBS, "Implementing taxation on individual stock market gains this year would be detrimental to capital market development given that investors are already experiencing losses due to the market downturn."

In under three months, the DSEX, Dhaka bourse's benchmark index, fell by almost 1000 points to 5518 on Thursday, marking a 36-month low.

He said the government should allow the market to develop in line with the economy before considering taxes. For example, he noted that the Indian government began taxing their capital market gains after significant maturity and growth of both the market and its investors. 

"India started taxing long-term capital gains in 2018, after two hundred years of their stock market history, whereas Bangladesh has a long way to go," Ali added.

Saiful Islam, president of the DSE Brokers Association, said given the significant decline experienced by the stock market this year, it urgently requires policy support. 

He cautioned that the prospect of additional tax burdens would be detrimental to both the market and investors, saying, "Introducing a new tax during a downturn would discourage investment."

Abu Ahmed, a stock market expert and former economics professor at Dhaka University, said stock investors in Bangladesh have nearly forgotten about capital gains amidst the prolonged bearish trend since the crash of 2010-11. 

He expressed scepticism about the government generating sufficient revenue from the proposed measure, suggesting, "Instead, the capital gains tax could significantly harm investors."

In September 2022, speculation about imposing a capital gains tax on individuals prompted a steep sell-off in the market. 

Reflecting Professor Abu Ahmed's sentiments, Minhaz Zia, a chartered financial analyst and chairman of NorthStar Investments Bangladesh Ltd, said the IMF provides generic recommendations for countries seeking its assistance and it is up to the governments to decide which incentives to retain and which to eliminate.