The way to save a suffocating person is to provide some air not choke him further; the new CGT calculation method is just choking the investors; IRD can use an alternative solution

-Yogesh Raj Niroula

The financial market was rattled by the provision of Capital Gains Tax on right and bonus shares this week which led to protest and strike called by various Nepal’s Investors Associations to which the government was compelled to postpone the provision and review the methodology of calculating CGT. The main concern of government to roll out the provision was to curb Tax evasion but the CGT on right and bonus shares would put all the Investors at huge disadvantage. Although the new provision was not proper the only question remaining is “Are some investors using the current CGT calculation method for evading taxes?” and if so “What is the possible solution to the problem?”

On Thursday, June 7, 2018 notice of the base price of recently adjusted companies Mirmire Microfinance (MMFDB), Jebils Finance (JEFL) and RSDC Laghubitta (RSDC) was published at Rs. 1919.35, Rs. 781.38 and Rs. 138.57 respectively which will be used for future CGT calculations signaling that old system will be continued. Basically, the base price doesn’t change often and is adjusted after changes in capital structure of the concerned company’s stock like when right and bonus shares are issued. NEPSE publishes the adjusted market price and base price right after the book closure date of capital structure change. Is the method of calculating base price redundant and gives some investors upper hand to evade taxes? Probably the only way to know is through few calculations but the list of official base prices of all the companies cannot be found in NEPSE website therefore base price data has been taken from sharesansar.com.

Based on the data of Thursday, June 7, 2018 of Base Prices and Last Transaction Price (LTP) taken from sharesansar.com there is huge discrepancies in the old CGT calculation system and the claims of tax evasion from government is quite true. It is quite surprising to see data like the base price of Nepal Life Insurance Company Limited (NLIC) at Rs. 2,282 and LTP at Rs. 1,096 tallying a difference of Rs. 1,186 between the two prices. Also at the other extreme end Rastriya Beema Company Limited (RBCL) tops the list with Base Price at Rs. 5,710 and LTP at Rs. 11,900 tallying a difference of Rs. 6,190. From, the above extremities in differences, it is clear that the old system can be used for tax evasion as one can buy NLIC at current price and sell below the base price of Rs. 2,282 without paying any CGT on the profit. However, the data also means that RBCL investors are at huge disadvantage because they will still be paying CGT even if they are in loss as one can be buying at current price and selling above Rs. 5,710. Perhaps, there were some who were taking advantage of this loophole but during a bear market even this strategy cannot work to the benefit of the same investor. Therefore, we can conclude that the system of base price currently being used by NEPSE is totally redundant and proper solution is needed that would be appropriate for both the investors and government.

The only solution to this problem would be to use the CGT calculation system used worldwide which is only possible with implementation of Online Trading System. Every individual investor has their own base price or the cost price of stock of an individual company which will serve as the base for CGT calculation. The cost price changes when the individual purchases additional stocks of the same company either at higher price or lower price relative to the previous purchase. Additionally, same applies for the price adjustment during right and bonus shares. The average cost price of acquiring the stocks at different price levels and situations should be the actual base price for calculating CGT which is being used worldwide. With the technology that our market is going to receive in near term, the NEPSE’s online trading system should be perfectly able to handle the calculation of cost of the current withheld individual stocks of any individual investor. With such system in place, the CGT can be calculated when that individual sells the stocks either partially or entirely. The only question that remains is “Are the government officials smart enough to figure out what would be proper for the market and still be doing justice to the investors?

(The author of this article is an avid investor of Nepal and a keen observer of capital market)