Row over new CGT formula halts stock trading

Published On: June 6, 2018 02:30 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, June 6: The stock market came to a complete halt Tuesday as investors 'boycotted' trading to protest the change in the way the capital gains tax (CGT) on rights and bonus shares is calculated.

As investors did not place the order for buying or selling stocks, to protest the government decision to calculate the capital gain on rights and bonus shares according to the new formula, there was not a single transaction in the Nepal Stock Exchange (Nepse), the only secondary market of the country.Ending a practice whereby shareholders were required to pay the CGT upon the increase of the share price from the base, or adjusted price, the Nepse announced the decision to impose the CGT on the surge of the price of shares from the face-value.

Nepse started imposing the CGT on the sale of rights and bonus shares according to the new calculation method after the Inland Revenue Department (IRD) issued a directive on the calculation method. The decision of the IRD to tweak the formula comes in the wake of the government's efforts to shore up its revenue. The IRD has cited the provision of the income tax act to instruct Nepse to calculate the capital gain on rights and bonus shares.

Investors argue that the new calculation formula would require them to pay the CGT even in the case of loss while selling their shares.

Earlier investors used to pay 5 percent of CGT on the gain made after selling their rights or bonus shares. The gain used to be calculated after deducting the price accrued from selling such shares from the adjusted price of such shares. However, the new calculation method means the capital gain will be calculated after deducting the market price of rights and bonus shares from the face value (Rs 100 in most cases).

According to the investors, the change in the calculation formula on the basis of base price of Nepse, which was set about 10 years ago through a ministerial level decision, unjustly puts tax burden on them.

“It's not justifiable to impose the capital gain tax that is not just to investors. They are ready to pay the tax on the overall gain after deducting their losses, interest payment and commission,” Prakash Tiwari, the chief investment manager at Hathway Investment Pvt Ltd, an investment company, told Republica. He said that the gain calculated on the basis of rise on price from face value does not account for such costs.

Apart from tweaking the calculation method of capital gain of rights and bonus shares, the government in its budget speech has separately decided to increase the CGT rate to 7.5 percent from 5 percent.

While the boycott was called by some organizations of stock investors on a 'voluntary' basis, the complete halt in the trading indicates the solidarity of brokerage firms to the protest of investors.

MoF forms a committee to study into CGT issue

Meanwhile, the Ministry of Finance (MoF) formed a committee on Tuesday to look into the issue of the capital gain tax formula on rights and bonus shares that triggered investors' protest.

The committee headed by Uttar Kumar Khatri, a joint secretary at the ministry, will include a member from the Securities Board of Nepal (Sebon), Nepse, CDS and Clearing Ltd, and invited members from investors' organizations.

Khatri, who is also the head of the Financial Sector Management Division at the MoF, told Republica that the committee will submit its report to the ministry within 15 days following consultations with all stakeholders.

“The committee will provide its recommendation to address the current dispute over the CGT calculation on bonus and rights shares,” said Khatri.


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