KATHMANDU, July 3: Nepal Stock Exchange (Nepse) index plunged 21.99 points on Sunday as the government's preparation to bring brokerage commission within the scope of value added tax (VAT) sends panic among investors.
The stocks started to dive as soon as the market opened for trading on Sunday following a halt of trading on Thursday by brokers to protest the order to two brokerage firms by the Inland Revenue Department (IRD) to file outstanding VAT dues.
Though the brokerage firms resumed trading from Sunday following a meeting with Revenue Secretary on Friday, investors seemed to be worried that they have to shoulder the VAT burden on brokerage commission.
“There are a lot of confusions among investors over the VAT issue. They are discouraged with the decision of imposition of 13 percent VAT on brokerage commission,” Anjib Tuladhar, a stock investor, told Republica. “Interested buyers were afraid of buying, while those holding shares are offloading due to worries that they cannot withstand the rising transaction cost once the VAT is imposed,” he added.
The IRD recently carried out VAT assessment of two brokerage firms, determined the tax liabilities for them and ordered them to get registered with VAT. The IRD is also said to preparing to send similar letter to other brokerage firms. Stock brokers have agreed to resume trading in a usual way without issuing VAT bill until they are registered with VAT.
The finance ministry has indicated that it would address the brokers' demand of resolving the issue of VAT overdue for the last four years.
Criticizing the IRD's order, investors say that the government decision could push the market toward downturn. “It seems that the government wants to boost tax collection amid rise in turnover in the stock market. But this decision will discourage many investors and the aim to attract more capital in the stock market will not be met,” he added.
He also drew analogy from market downturn in 2010 and the stock market crash after former Finance Minister Baburam Bhattarai's sudden decision to increase capital gains tax (CGT) to 10 percent from 5 percent.
“Then it was only about the tax when there is capital gain. Now, investors will have to pay 13 percent tax on brokerage commission for each transaction. The government is becoming partner of the brokerage firms in extracting more cash from investors who are already paying the highest commission in South Asia,” said Tuladhar.
Some investors also say that the capital market should be exempted from the VAT as the transactions in the market are like financial services. Banking and financial transactions are not under VAT net.
“Even if the VAT has to be collected, it should be calculated within the existing brokerage commission which is already very high,” Chhote Lal Rauniyar, another investor, told Republica.