CGT collection slumps due to low confidence among investors

Published On: June 18, 2024 08:30 AM NPT By: Republica  | @RepublicaNepal

Govt collects capital gains tax of Rs 4.85 billion in first 11 months of the current FY

KATHMANDU, June 18: The government collected capital gains tax (CGT) of Rs 4.85 billion from the shares trading in the first 11 months of the current fiscal year.

According to the CDS and Clearing Limited (CDSC), the government generated the aforementioned amount of tax revenue from shares trading in the secondary market during mid-July 2023 and mid-June 2024. In the review period, the share market could not perform better, mainly due to the low confidence among the investors.

The records with the CDSC show that the government collected the highest revenue of Rs 972 million under the heading during mid-January and mid-February. Similarly, the least amount of the CGT worth Rs 84.15 million was recorded in one month between mid-October and mid-November.

The market reeled in slow paces almost throughout the review period. However, some positive vibes have been seen in the country’s only stock exchange market in the past few months, mainly after Nepal Rastra Bank took flexible policy in margin lending through a half-year review of the monetary policy for the current FY.

According to the CDSC, the government collected Rs 2.86 billion in the CGT until mid February. In the past four months, the sector collected an additional Rs 1.99 billion in the state coffers.  

Individual investors are liable to pay CGT of 5 percent or 7.5 percent, depending on the duration that the investors hold shares before they take them for transactions. The individuals who sell the stocks they hold within one year from the purchase date are considered as short-term investors who are liable to pay CGT of 7.5 percent, while those who sell after one year are categorized as long-term investors who are subjected to 5 percent CGT. The institutional investors are liable to pay 10 percent tax on their capital gains.  

According to the CDSC, the CGT collection from the stock market had reached an all-time high of Rs 14.13 billion during the impacts of the COVID-19 in FY 2020/21. It slowed down in the following year with the revenue collection under this heading falling straight to Rs 10.35 billion. In the FY 2022/23, the amount stood at a mere Rs 2.97 billion.  

The amount of the CGT collection depends on the market capitalization which measures an average shares value of companies listed in the secondary market. As of mid-July 2023, the value of market capitalization was Rs 3.082.52 trillion, which grew around eight percent to Rs 3.322 trillion during the review period.

On August 18, 2021, the market capitalization reached an all time high at Rs 4.468 trillion. However, it dropped to Rs 2.869 trillion in mid-July 2022. 

A high level task force suggests govt to increase CGT to 10 percent

A high level committee formed to recommend timely reform in the tax system has advised the government to increase the CGT rate on shares transactions.

At a time when the shares investors have been demanding the government to reduce CGT rate, the task force has recommended the government to raise the rate by 2.5 percent. Former Finance Minister Prakash Sharan Mahat formed the panel in September 2023.

The committee has recommended the government to take CGT of 10 percent in stocks traded within a year, while a 7.5 percent CGT has been advised for stocks traded in over a year. The government formed the study panel citing to boost the revenue generation by the government as it struggles to meet the targeted revenue collection.    

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