No more tax waiver on dividend income

The proposed Income Tax Act 2023 left no room for tax exemption on small investors' annual dividend income from stocks and mutual funds, and market experts believe it would add to the country's left-behind capital market's struggle to attract savers.

Companies and mutual funds deduct 10% to 20% taxes, depending on the type and size of the investors, at source before the disbursement of their cash dividends, while the highest-slab taxpayers' have to pay up to 25% tax on their income including dividends.

However, individual investors, during their tax return submission, had been allowed to claim an adjustment of the already deducted tax at source on their annual dividend income up to Tk50,000 from stocks and up to Tk25,000 from mutual funds.

The Income Tax Bill 2023, placed in parliament last week, left no provision for the dividend tax exemption regardless of how small the amount is.

If the bill is passed, an individual investor will end up paying Tk5,000 tax on Tk50,000 in annual dividend income from stocks, which is exempted till now.

"It is an adverse move against the capital market's ongoing struggle to attract small savers," said Md Sajedul Islam, senior vice president of DSE Brokers Association (DBA).

Over the recent years, there had been a well thought, organised promotion of stable investments in the stock market so that families buy fundamentally sound stocks at rational prices, hold them for long term, and earn dividends over years alongside the opportunities for a capital gain that can create generational wealth, he said.

And, if small dividends become taxable, the much needed positive change would be discouraged, added Islam, who is the managing director of brokerage firm Shyamol Equity Management, that serves around 35 thousand retail investors.

"No doubt that the government is in need of higher revenues, but the cost-benefit analysis of the move could have been done," he added.

"We were requesting to raise the limit for tax-free dividend income to at least up to Tk1 lakh for individual investors and it is being made zero now. We would request the government not to proceed with the plan," said Islam.  

Chartered Financial Analyst Md Moniruzzaman, a former vice president of the Bangladesh Merchant Bankers Association (BMBA), said the prevailing incentive to small investors for sticking to the safer, disciplined way of investment should remain there.

If dividends are discouraged, there is a significant risk that people would prefer capital gains over dividends and chase speculative stocks on the bourses, added Moniruzzaman who is the managing director of Prime Bank Securities.

"The change will add to the behavioral problems in the country's underdeveloped stock market," he said.

A relief for the mutual fund investors

However, the proposed Income Tax Act has corrected a double taxation problem for the mutual fund industry that came earlier this fiscal year.

Income, mainly the dividends from portfolio companies, of mutual funds was made taxable last year and it ended to create a double taxation as mutual fund investors had to pay the same tax again when they avail dividends from the mutual funds.

Now income of mutual funds, collective investment schemes, alternative investment funds and special purpose vehicles would be tax exempted.

However, there are still pockets of areas such as tax rebate where investments in open-ended mutual funds are treated differently than direct investment in listed stocks and closed-end mutual funds as all the instruments except for listed shares have had a limit of Tk5 lakh for investment tax rebate.

"We believe these should receive equal treatment as the underlying investments are similar," said Chartered Financial Analyst Asif Khan, Chairman of Edge Asset Management.

Besides, an individual now will avail up to Tk10 lakh in tax rebate against investment in several sectors, down from Tk15 lakh.

Individual investors' capital gains remained untaxed

Offering another breathing space to the capital market, the local individual investors' capital gains remained untaxed, while institutions and non-Bangladeshi individuals will have to keep paying a 10% tax on their capital gains from listed securities.