Currently, the government slaps capital gains tax (CGT) of five percent and 10 percent on retail and institutional investors, respectively, on the shares they sell. [break]These taxes are deducted at source, meaning the investors have to deposit amount soon after they report profit on share trading.
As of now, the task of collecting taxes is being done manually, so Nepal Stock Exchange (Nepse) hasn´t been facing much trouble. But once CDS goes live, the job of calculating these taxes and deducting them from the amount of profit made will rest on the software that the government has installed.
And this is where the problem lies.
“Once we launch CDS, the government wants us to capture day-to-day price fluctuations in the share market,” an official of CDS and Clearing Limited, which is fully owned by state-owned Nepal Stock Exchange (Nepse), told Republica. This, according to the official, is “nearly impossible as it creates a burden on the system”.
“Besides, we also need to insert every previous record, like when and at what price the share was bought, and how many times the shares changed hands, if we are to calculate CGT through the automated system. This is because a person who, say, had bought 1,000 units of shares may not have sold all stocks at one time and the person may have also bought shares of same company at different dates and prices. All these are pretty complex issues,” the official said.
So how are other countries that have automated stock transactions collecting these taxes? In most of the countries, including India, CGT liability is declared by investors themselves, which they deposit at the state coffer at the end of the year. One of the ways to make things easier is to follow this practice. But the government is aware of the “moral hazard” issue as many may simply evade taxes, affecting the government´s income level.
The other option floated by CDS and Clearing Limited is slapping CHT on closing price of stocks as capturing one price at the end of the day, rather than every fluctuations throughout the day, is much easier. If this practice is pursued, investors won´t be taxed based on real time buying/selling prices but based on value of stocks at the time when the bourse closes.
“But this method wouldn´t be fair on investors as closing price of stocks could be higher than the one at which they were bought,” an official of Nepse said on condition of anonymity. In other words, a share bought for, say, Rs 150 during the day time could rise to any amount by the time the stock market closes.
“This means the investor who has sold shares will have to pay higher amount as CGT,” the official said. On the other hand, the government also stands to lose if such a taxation system is introduced, as shares which were bought at higher value could come down by the time share trading ends for the day.
The other option floated by the government is slapping transaction tax, under which investors will have to pay certain amount based on volume of transaction and not on amount of profit made.
This tax regime has received backing of many brokers as well. But the downside of this system is that investors will have to pay taxes even if they sell shares at loss. The government is not very keen on introducing this tax at the moment, as investor confidence is at a low and such measures may keep investors at bay.
“However, we have asked concerned bodies to conduct studies on its feasibility,” a high-ranking official of the Ministry of Finance told Republica. “We´ll see the findings of the studies and decide on what to do next.”
The government has until mid-May to decide on how to tax stock transactions as that´s the time when it is planning to bring CDS and Clearing Limited into operation.
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