Government Amasses Rs 4.85 Billion in Capital Gains Tax from Share Trading in First 11 Months of Current Fiscal Year

The government has reported the collection of Rs 4.85 billion in capital gains tax (CGT) from share trading in the secondary market during the first eleven months of the current fiscal year, from mid-July 2023 to mid-June 2024, as per data from CDS and Clearing Limited (CDSC).

The stock market's performance during this period was hindered by low investor confidence, resulting in subpar market activity. Despite this, recent months have shown some positive movement, influenced by more lenient margin lending policies introduced by Nepal Rastra Bank in the mid-year review of the current fiscal monetary policy.

CGT collections have fluctuated significantly month-to-month. The peak collection was Rs 972 million, recorded between mid-January and mid-February, whereas the lowest was Rs 84.15 million, collected from mid-October to mid-November.

By mid-February, CGT collections had reached Rs 2.86 billion. Over the next four months, an additional Rs 1.99 billion was accumulated, culminating in a total of Rs 4.85 billion.

Current CGT rates vary based on the holding period of the shares. Individual investors pay 5 percent CGT on shares held for more than a year and 7.5 percent on shares sold within a year. Institutional investors are taxed at 10 percent on their capital gains.

Historical data shows significant variation in CGT revenue. The highest collection was Rs 14.13 billion in FY 2020/21 during the COVID-19 pandemic, which then decreased to Rs 10.35 billion the following year and further to Rs 2.97 billion in FY 2022/23.

The amount of CGT collected is closely linked to market capitalization, the total market value of listed companies' shares. From mid-July 2023, the market capitalization rose by about eight percent, from Rs 3.082.52 trillion to Rs 3.322 trillion. The all-time high market capitalization was Rs 4.468 trillion on August 18, 2021, but it dropped to Rs 2.869 trillion by mid-July 2022.

To address current revenue shortfalls, a high-level task force has recommended an increase in the CGT rate. Formed by Former Finance Minister Prakash Sharan Mahat in September 2023, the committee suggests raising the CGT to 10 percent for stocks sold within a year and to 7.5 percent for stocks held longer. This recommendation comes amid calls from investors for a reduction in CGT rates.