Dissecting the First Federal budget; dark clouds and bright silver linings all together

After a long anticipation, the first federal budget has finally made its way to the federal parliament on Jestha 15, 2075. The first Finance Minister of full-fledged Federal Nepal Dr. Yubaraj Khatiwada presented the budget for the upcoming fiscal year at the federal parliament. Before the budget announcement, lots of speculations and market manipulations were making rounds at NEPSE which is the only share market of the nation. With the announcement of the budget, the speculations and rumors have finally come to an end, thus throwing up a mixed message regarding the government’s fiscal position towards the stock market.

The unfortunate CGT

Despite of growing concerns at  every rank and files, the FM who has been viewed as unfriendly towards share market has finally levied a burden of 50% more Capital Gain Tax to the individual shareholders through the new federal budget. As per the budget statement, the individual investors are now required to pay 7.5% as Capital Gain Tax for their profits in stock trading whereas the CGT rate for the institutional investors has been kept unchanged. This single move from the FM is expected to have discouraging impact on the already edgy investors who are highly unlikely to enter the already bearish market thereby further declining the turnover amount.

The government might have brought the latest reform in tax rate with a good intention to increase its revenue base in order to meet the growing demands of funds to fulfill the three stage governance. However, this act of the government might backfire as high tax means low investors motivation towards share market. This leads to low turnover and 7.5% of the minimal turnover will always result to minimal tax collection; no matter the CGT is further hiked to 10% or even higher. Let it also be clear that the first elected government of the republic of Nepal with then FM Dr. Baburam Bhattarai had tried to mess up with CGT with an ambition of collecting bigger chunk of tax whereas the move utterly backfired thereby pulling down the NEPSE index by more than 800 points to the mere 292 mark.

Some Silver linings

Before the budget was announced, the big fishes in the sharemarket who have had a long history of playing foul in sharemarket had tried to spread rumors that the government is bent on levying VAT on the commissions that the brokers receive from their customers. Understanding the gravity of the event, FM Dr. Khatiwada has decided not to embark on the further adventures in the share market, possibly analyzing that the decision of increasing CGT alone is sufficient to send shockwaves to the market.

Force Entry into Share market

Dr. Khatiwada has made it clear and straightforward that all the for-profit businesses institutions which are in service sectors having a paid up value of Rs 1 arba and more will be served with mandatory provision to pull them into secondary market. This, if implemented successfully, will see number of companies of real sector issuing their shares to general public with or without premium value attached. In the same line, business firms under private equity, venture firm will also see push from government’ in order to issue their equity shares to general public.

Likewise, there is another provision that has outlined to provide up to 10% exemption from income tax to the firms with paid up value of Rs 50 crore for the 3 consecutive years if such institutions decide to go public by floating shares to them. In such a case, the government’s flexibility in tax exemption is expected to bring more companies of real sector to the market.

Regulations to regulate regulators

In addition, the budget has also envisioned to bring necessary reforms to the Nepal Rastra Bank by enforcing necessary steps to regulate even the market regulating body. The provisions in Securities Act, Insurance Act and other financial acts are expected to be amended if one is to follow the spirit of the budget.

Takeaways

The budget might appear friendly to the national economy through its high emphasis on infrastructure projects; however has failed miserably to cheer up the investors who have been reeling under bearish market for 2 consecutive years now. People had expected that the budget could be new turning point for our share market from where the market could begin upward rally. This possibility has been partly doused at least for some time now until and unless the government brings the clear policy to address the demand and supply side of the share market.

Bringing new companies to the market is undoubtedly very good but not so good at the cost of existing shareholders. If the government fails to improve the supply curve of the present market by mandating more banks/brokerage firms to expand to every 77 districts and 753 local units, then the reform slogans will only be limited to election manifestos and press conferences. The market currently needs demand side management and the same could have been addressed somehow, if not fully, by opening legal channel for the NRNs to bring in their investments into the market, by taking brokerage service to every Saila dai and Maili didi of towns and villages and by regulating the Mutual Fund sector (lot was actually expected from Dr. Khatiwada).