- Proposed tax applies to net income, allowing deductions for capital losses before calculating the tax owed.
- Short-term traders face tax rates determined by existing tax slabs, potentially resulting in higher taxes on immediate gains.
- Worries emerge regarding perceived bias against individual investors versus companies
In a groundbreaking move, individual investors will be subject to the scrutiny of their beneficiary owner’s (BO) accounts by the revenue authority for capital gains tax purposes for the first time in the fiscal year 2024-25 (FY25). This follows the proposed budget unveiled by the finance minister in parliament on Thursday (June 6, 2024).
You can also read: First Prospective Tax Rates to Ensure Stable Investment Environment
Tk5 million Threshold for Taxation
According to the budget proposal, a person will have to pay capital gains tax if their profits from share portfolios exceed Tk5 million. The applicable tax rate will depend on whether the investor held the shares for over five years or less.
Lower Tax Rate for Long-Term Holdings
If an individual earns more than the Tk5 million threshold from shares held for over five years, they will pay a 15% tax only on the additional amount gained beyond the threshold. This time condition aims to incentivize long-term investments in the capital market.
However, if the shareholding duration is less than 5 years, the tax rate will be determined by the existing tax slabs for individual taxpayers, resulting in potentially higher taxes on short-term capital gains.
What is Gain Tax?
A taxable gain is the profit earned from the sale of an asset. To calculate the taxable gain on the sale of an asset, an individual subtracts the original purchase price from the sale price of the investment.
Complicated Tax Calculations
For instance, if someone has a yearly income of Tk10 million and earns an additional Tk10 million in capital gains from selling securities held less than 5 years, the tax will apply on Tk9.65 million (total income minus Tk0.35 million tax-free threshold) plus the Tk5 million capital gains exceeding the threshold.
The NBR will then impose rising tax slabs – 5% on the first Tk0.1 million, 10% on the next Tk0.4 million, 15% on the next Tk0.5 million, 20% on the following Tk0.5 million, 25% up to Tk2 million, and the maximum 30% rate on any remaining amount.
Factoring Losses into Tax Calculations
The proposed capital gains tax will apply to net income, meaning capital losses can be deducted from capital gains before calculating the tax owed.
Market operators indicate the new tax will primarily impact high-net-worth individuals with sizeable portfolios. An investor with a Tk50 million portfolio would likely pay capital gains tax if profits exceed 10%.
Is the New Capital Gain Tax Unfair to Individual Investors?
Md. Moniruzzaman, Managing Director of Prime Bank Securities, noted that the new capital gain tax would minimally impact general investors. However, individual investors could face higher tax rates compared to companies and their sponsor-directors, who pay 15% and 10% respectively.
Md. Mahmudur Rahman, First Assistant Vice President of Prime Bank, suggested that the proposed tax structure is somewhat discriminatory towards individuals. An anonymous stock broker added that high net-worth individuals with multiple BO accounts might struggle with the increased scrutiny from tax authorities, potentially causing a psychological impact. Additionally, the broker pointed out that companies pay corporate tax on net profits, while individual investors’ costs are not factored into capital gain tax calculations, leading to feelings of unfair treatment.
“The proposed tax on capital gains is a bit discriminatory for individuals,”
– “The proposed tax on capital gains is a bit discriminatory for individuals,”
How will the new capital gains tax impact long-term investment strategies?
The new capital gains tax, set to increase to 30%, will significantly impact long-term investment strategies for individual investors. Here are some key implications:
Long-Term Holdings:
The tax structure incentivizes long-term holdings by offering a lower tax rate of 15% on gains from shares held for over five years. This encourages investors to hold onto their investments for extended periods, which can lead to more stable and potentially higher returns.
Tax Efficiency:
The tax system allows for deductions of capital losses, which can help offset gains and reduce the overall tax liability. This can be particularly beneficial for investors who have experienced losses in their portfolios, as it can help minimize the impact of the higher tax rates.
Tax Rates for Short-Term Trades:
Short-term trades, defined as holding periods of less than five years, will be taxed at rates determined by existing tax slabs. This can result in higher taxes on immediate gains, potentially discouraging short-term trading and favoring long-term investments.
Impact on High-Net-Worth Investors:
The new tax will primarily affect high-net-worth individuals with significant portfolios. Investors with portfolios exceeding Tk 5 million will be subject to higher tax rates, which can lead to a higher tax burden.
Implementation Challenges:
The new tax system may face challenges in its implementation due to the need for accurate tracking of investment dates and holding periods. This could lead to complications in tax collection and potentially create a psychological impact on high-net-worth individuals with multiple beneficiary owner accounts.
Overall, the new capital gains tax structure aims to promote long-term investments by offering more favorable tax rates for extended holding periods. However, it also introduces higher tax rates for short-term trades, which can impact the investment strategies of individual investors.
