Decision of Inland Revenue to tax right & bonus shares at par value sours investors’ sentiment; Double-standard attitude & tax terror from government

Today’s instruction from Inland Revenue Department under Ministry of Finance has raised a million-dollar question: Does the government actually want capital formation through the stock market of Nepal? The first trading hour today has been bomb-shelled with the decision from IRD that has asked Nepal Stock Exchange (NEPSE) to calculate capital gains tax on bonus and right shares by keeping paid-up value of share (i.e. par value) as the cost price effective from Jestha 20, 2075.

Following the notice published in NEPSE this morning, sellers are now required to pay higher portion of their income from sales of stocks as Capital Gain Tax. The investors hadn’t shown much resentment towards the government even when it had hiked up the CGT to 7.50% through the recently presented Federal budget. Now, the story seems different. IRD claims that the issuance was made as per the provisions in Income Tax Act 2058. The quick glance of this latest tax terror presents a grim picture as the shareholders selling bonus/right shares of Soaltee Hotel will have to pay their tax keeping Rs 10 as the cost price while shareholders of other companies will have to pay their capital gains tax keeping Rs 100 as the cost price.

Investors will now have to pay tax even when selling on loss

To elucidate further that the investors will now be paying Capital Gain Tax even for their losses, consider an example of SCB. As per this taxation system, investor will have to pay a capital gain tax of 7.50% on selling bonus share at above Rs.100 because cost price of bonus or right share is taken at the par value of Rs 100. For example, if one had bought Standard Chartered Bank (SCB)’s 10 shares at Rs 2,200 prior to book closure date and if 100% bonus is issued, then the price of SCB will be adjusted to Rs 1100 (2,200/2) with total of 20 shares (extra 10 shares of bonus). Now investors will make profit, if the price of SCB increases from Rs 1,100. But if SCB stock price decreases from the adjusted price then s/he will have a loss. For example, if I sell 20 unit shares (10 bonus share included) of SCB at Rs 1050, I will have a total loss of Rs 1000 and as per the new rule I have to pay a capital gain tax of 7.5% on Rs 9,500 (difference between market price and par value of bonus share) on selling 10 bonus shares at Rs 1,050 which will cost extra Rs 712.5 on my loss.

Sadly, the latest move of the government seems to be completely unilateral and miscalculated. The government has provided tall promises through its budget to formulate national capital via share market and to attract the investments from NRNs. However, people in revenue desk have even failed to calculate that why would someone enter the market with his/her hard-earned money in a situation when the government is completely tilted to just collecting tax even for the losses.

NEPSE and SEBON completely blindsided

Next, the move has also highlighted the tax coercion attitude of the government which doesn’t even pay small bit of responsiveness to its own agencies devoted towards share market. Authorities who work closely with the government and privy with the tax issue since long have admitted that this is a unilateral move from the government. This decision from government have rendered even the regulators and stakeholders speechless who have no other option rather than to follow the immature directives from the government. Dissatisfactions within government agencies are brewing who have described this decision as an ill-conceived one; a decision from someone who doesn’t understand a bit about share market and is abnormally possessed with unscientific tax principles.

The sentiment of investors was well-reflected by the continuous southbound of the NEPSE index early in the morning today. The index had shed more than 2% within the first half-an-hour or so before recovering the lost points. As expected, the most panicked and offended ones are the investors who have been subjected to number of such policy-level bullying in many occasions before.

New provision makes NEPSE’s price adjustment modality useless

Mr. Anjib Tuladhar, an investor, was quick to level this act of the government as double-standard. He made it very clear that he is not against the government but is forced to protest the unscientific tax decision the government has coerced. “In which part of the world can we see two government agencies working with 2 different modalities?”, he asks. “NEPSE has its own system of adjusting the price of stocks for the right and bonus shares. Now, by what heavens, Inland Revenue Department found a new pretense to challenge the existing practice of another government body?”, Mr. Tuladhar asks. He also clarifies that all the investors will have to come hard against this tax tyranny of the government and has questioned “Is the government sitting at Singhadurbar only to raise taxes? Hasn’t it got any responsibilities to safeguard the interest of the investors, to protect them when the market is having not-so-good times?”

“If the government wants to levy CGT on selling bonus (right) shares at par value, it should not adjust the price after book closure. Sadly, it is using double standard approach for price adjustment and tax payment for same stock.” highlights Mr. Tuladhar.