Rumors of Capital gain tax increment and VAT in capital market affecting investor sentiment; Big players taking advantage of the noise
Mon, May 28, 2018 11:14 AM on Stock Market,
The budget of 2075 will be presented on 15th Jestha 2075 (tomorrow) and pre-budget rumors of increasing capital gain tax is hitting the sentiments of investors.
If investor makes profit of Rs 10,000 after brokerage commission, DP charge and SEBON charge then they have to pay 5% of total profit (after charges) as capital gain tax. Currently capital gain tax in Nepal is 5%, which is rumored to increase to 10% in this budget.
But the question is
Will increased capital gain-tax put pressure on NEPSE?
Three years back, when market was booming we used to hear news of investors who changed lakhs into crores and during that period majority of people were in profit.
Now the things are different, NEPSE is in the 2nd year of bearish trend, most of the investors who are holding their stocks are in loss and those who sold their stocks are waiting for some bullish momentum, as a result demand in market is very low. If investor were in profit, they could book their profit and exit the trade as to avoid paying extra 5% to the government which could immediately lower the NEPSE index.
In this situation even if government increases capital gain tax, it will have least effect on NEPSE in short run; market may not react to the news because investors who are holding their stocks are already in huge loss and increased capital gain tax will discourage new investors in market. Due to low demand in market, there won’t be a good opportunity for sellers as a result market may go into the consolidation phase.
What is the possibility of increasing capital gain tax by government?
Government officials are well aware of bear market and the negative effects of bear market to country’s economy. Government is not getting good revenue (capital gain tax) from market as most of the investors are in loss and in such times if government increases capital gain tax that will build negative sentiments in the investors and market takes longer time to regain bullish trend which will ultimately decrease the government revenue.
During the Maoist led government of 2008, under then finance minister Dr. Baburam Bhattrai , government had increased capital-gain tax from 5% to 10% , which is one of the reason for next three years of strong bear market where market lose 884 points from 1175.38 on 31st August 2008 to 291 on June 2011. As a result, revenue from capital gain tax has decreased to minimum, as most of the investors are losing.
From these points, we can say government should avoid increasing capital gain tax at this point of time.
Rumors of increasing VAT tax on broker’s commission
Rumors are spreading about increasing 13% VAT tax on broker’s commission before budget. Broker commission in Nepal is in the range of 0.6% to 0.4% and 13% extra vat on this, increases the commission but its impact on investors sentiment will be minimal. Brokerage charge of 0.5% on 10 lakhs before increased VAT will be Rs 5000 and after VAT it will stand at Rs 5650, difference is low. Online trading which is about to be introduced in Nepali stock market will reduce brokerage charge in future. So brokerage charge is not a matter of concern for investors in this budget.
Investors are panicking by these rumors which took NEPSE in red zone in last two trading days but in reality there is no need for panicking. Rumors usually revolve before budget and big-player of market take advantage of investors' panic. So, stay calm and never react to rumors because 8 out 10 rumors are fake.
If MoF decreases capital gain tax, that will encourage new investors in the market which can turn NEPSE momentum to uptrend. In bull market many investors makes profit, so forth increasing government revenue in market as well.
Government approach towards market is positive and as an investor we expect budget to encourage stock market investment and in short, budget should be investment friendly.
