Stocks tax policy scares off long-term investors

The government's tax measures contradict its plan to turn the stock market into a destination for long-term investments, something apparent in the pace with which individuals and institutions trade shares simply to make a quick buck. 

If investors opt to retain their shares for a substantial amount of time to receive the associated companies' dividend income, they have to pay a 10 per cent to 25 per cent tax on the earning.

On the other hand, no tax needs to be paid on profits generated through the trade of shares.

Pooling long-term investments requires the government withdrawing the tax on dividend income, said Sayadur Rahman, president of Bangladesh Merchant Bankers Association (BMBA).

"The listed companies declare the dividend after paying corporate tax. The dividend income tax is levied on that dividend again, so it is a type of a double taxation. The tax is much high too," he said.

Withdrawing the tax will encourage investors to retain shares for a long time to reap dividends instead of purchasing and selling those frequently, helping the stock market to remain stable, he added.

A stable stock market can ensure more tax for the government in the long run, he Rahman.

A top official of the Bangladesh Securities and Exchange Commission (BSEC), preferring anonymity, said the National Board of Revenue (NBR) always tries to use any taxation means available for increasing revenue generation.

As a part of this, the NBR once tries to impose a tax on capital gains. However, this could have been a big mistake as there are many times investors incur losses in selling shares, he said.

The NBR should withdraw the tax on dividend income or at least can increase the tax-free limit on dividend income to attract long time investments, said Mir Ariful Islam, managing director and CEO of Sandhani Asset Management.

At present, dividend income of up to Tk 50,000 is tax free.

While this is applicable for closed end mutual funds, the limit is much lower, Tk 25,000, for open ended mutual funds, Islam said.

Mutual funds pool money from investors to channel it into securities such as stocks, bonds, and other assets.

Depending on the profits earned, investors are then paid their share as dividends. Closed end funds are listed with the stock exchange while open ended ones are not.

Having two different limits for products that are nearly the same is illogical, said Islam.

Moreover, the BSEC is promoting mutual funds, especially the open ended ones, for which the tax-free limit on income from it should be increased, he said.

The NBR should think out of the box and realise that lowering the tax on dividend income will enable a stable stock market, generating higher turnover taxes, he added.

The government's revenue generation from the stock market hit an 11-year high of Tk 290.88 crore in fiscal year 2021-22 thanks to a surge in turnover in Dhaka Stock Exchange (DSE).

The DSE earlier paid tax worth Tk 447 crore in fiscal year 2021-11, the highest in its history, when the market witnessed the highest turnover.

On one hand the BSEC is requesting investors to make long-term investments in the market to make it sustainable while on the other it is continuing to impose tax on dividend income, said a top official of a stock brokerage firm preferring anonymity.

This is contradictory, he said.

The BSEC should convince the NBR to withdraw the dividend income tax in order to lure investors to keep funds for a long time, he added.

Mohammad Emran Hasan, chief executive officer (CEO) of Shanta Asset Management, said the government should offer a supportive tax measure for long-term investments in the stock market.

As Bangladesh's stock market is still a frontier market, it needs to attract long-term investments where the dividend income tax is not supportive, he said.

So, the tax on dividend income should be at least reduced, he added.

"To attract long-term investments to the market, we are requesting the NBR all the time to increase the tax-free dividend income slab which will at least encourage small investors to keep their funds for long," said Richard D' Rozario, president of the DSE Brokers' Association of Bangladesh.

At present, dividend income of Tk 50,000 is tax free. On anything higher, the tax is 10 per cent if investors submit tax identification numbers and at least 15 per cent if they do not.

It does not end here. The tax rate can go up to 25 per cent if other incomes of taxpayers are taken into consideration, he said.

If anyone's tax rate for his total income is 25 per cent, the dividend income tax for that person is also 25 per cent, he explained.

This is way too high and not supportive of long-term investments, he added.

A top official of the BSEC, requesting not to be named, said it had also requested the NBR to at least reduce the dividend income tax in order to attract long-term investment from investors.