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Rich individuals want to buy stocks because they face high profit taxes

This has become a major problem for the market groups as these investors are the driving forces in the stock markets.

The imposition of a tax on capital gains from listed securities above Taka 50 lakh is likely to deter super-rich investors from the capital market as they will face a tax of over 40 percent on their capital gains, according to market insiders.

On Saturday, despite criticism from investors and market analysts, Parliament passed the Finance Act 2024 to introduce a capital gains tax.

Chartered Accountant Snehasish Barua, Director, SMAC Advisory Services Ltd, explained that in combination with the Finance Act, 2024 and the Income Tax Act, 2023, capital gains on assets held for more than 5 years will be 15% for individuals and assets held for a shorter period will be subject to regular income tax.

If a rich person deriving income from capital market only makes capital gains of over Taka 685,000 in the fiscal year 2023-24, he will be taxed at the rate of 25% and if his net worth exceeds Taka 50 crore, the rate will be 33.75% including the 35% surcharge, he added.

“Next year, the highest surcharge rate for him could reach an extreme high of 40.5% if he makes capital gains above 885,000 taka,” he said.

This has become a big problem for the market groups as these investors are the driving forces in the stock markets.

“This is a sudden punishment for the honest rich who have been looking at wealth creation along with providing equity to growing companies,” said Saiful Islam, president of DSE Brokers Association, adding that they will be desperately looking for alternatives when the capital market desperately needs more investment from the wealthy.

Rich people who do not hide their income or wealth are being discouraged from investing at a time when the market could play a major role in financing the next wave of private sector economic development, Islam added.

Most importantly, the tax rate was too high for large investors in the first year after its introduction and, ironically, the market is bleeding due to macroeconomic adversity, he said.

Chartered financial analyst Moniruzzaman, who is also managing director of Prime Bank Securities, said TBS profits are taxable in the civilized world and Bangladesh should not be an exception for decades. But the high tax will exceed that in developed and developing countries.

In addition, the mandatory holding period to minimize profit tax for local stock investors is too long compared to the US, India and most other comparable markets, he added.

According to PWC’s tax surveys, individuals in India pay a maximum of 15% tax on their short-term capital gains in the stock market, and only after their market has already travelled a long way.

In markets such as China, Japan and the USA the tax rate is 20%, in high-tax countries such as Sweden it is 30% and in crisis countries such as Turkey and Uganda it is 40%.

The standard holding period to minimize capital gains taxes is 12 to 36 months in most markets, but in Bangladesh it is still 60 months.

“We expect rationalization of taxes and lock-in period on capital market gains as it is a riskier option and a difficult decision for investors,” Moniruzzaman said.

The Income Tax Act 2023 made all income from capital market instruments – mutual funds, alternative investment funds, real estate funds and exchange-traded funds – tax-free. However, taxable capital gains and income from such instruments are taxed.

Sponsors, directors and placement shareholders of listed stocks and funds will have to pay a 10% withholding tax on their capital gains upon sale and their regular capital gains tax will be collected later when filing tax returns, said Md Abdul Kader Nabil, a brokerage professional and income tax expert.

If they sell after five years of holding, their capital gains tax rate will be 15%, and if they sell earlier, they will return to paying their regular income tax bracket unless the National Board of Revenue issues a supporting statutory regulatory order soon.
Countries such as the United Arab Emirates and Saudi Arabia, which are looking to develop their capital markets, have made private individuals’ capital gains tax-free, Nabil added.

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