Capital market shows mixed bag reactions to proposed budget

The proposed budget for the 2021-22 fiscal year is being hailed as business-friendly since it focuses on providing a breathing space to corporates, incentivising the next-level industrialisation and developing a skilled workforce for better employment.

Like the companies and the bourses, capital market analysts are also cheering the 250 basis points reduction in corporate tax for companies except financial service providers, telecom operators and tobacco companies.

The corporate tax cut, for both the listed and non-listed companies, will help listed firms strengthen their bottom line, said Bangladesh Merchant Bankers Association's Vice President Md Moniruzzaman.

His gross estimation suggests the 250 points cut in corporate tax would boost the listed firms' net profits by 4% on average.

But the capital market groups' demand for widening the corporate tax gap between listed and non-listed firms is ignored in the proposed budget, which will be a bar to the ongoing campaign to list more and more successful companies in the bourses.

Veteran stockbroker Shakil Rizvi, also a director of the Dhaka Stock Exchange (DSE), said, "The gap was 10 percentage points even two years ago and we had been requesting for a further widening so that the profit-making companies find the listing as a winning deal."

"The gap was narrowed to 7.5 percentage points in the previous budget and still there is no improvement," Rizvi told The Business Standard, adding, "If the government reduced corporate tax for the listed firms by another 250 basis points, it would boost the listed companies' earnings alongside incentivising the listing."

The government, the central bank and the capital market regulator together are trying to build a vibrant debt securities market in Bangladesh so that it can help the capital market flourish and also offer a relief to the banking system.

The proposed budget only waived the existing 4% tax on capital gains derived from any transfer of underlying assets of Sukuk or Shariah-compliant asset backed securities.

The securitisation under Sukuk will still remain subject to 7-9% costs against total value of the underlying assets in various forms such as registration cost, stamp duty and value added tax, said Ershad Hossain, the chief executive officer of City Bank Capital Resources Ltd which is serving Beximco Ltd to offer Tk3,000 crore Sukuk.

"The remaining cost is not feasible," commented the debt securities expert.

Incentivising fixed-income investments in bonds has long been a recommendation by the capital market experts but that remained unaddressed in the proposed budget.  

Income from only the zero-coupon bonds is tax exempted until the investor is a bank, non-bank financial institute or an insurer.

Capital market regulator and its regulated industries had been requesting the government to give similar tax exemption for income from all kinds of debt securities so that subordinated bonds, perpetual bonds, and Sukuk become popular among risk-averting investors.  

Income from treasury bonds and bills became subject to a 5% tax at source in the last fiscal year and that discouraged investors, right now the banks, said CFA Society Bangladesh' President Md Shaheen Iqbal.

Also, secondary market buyers of the treasury bills and bonds would be discouraged due to the 5% tax, said Shaheen Iqbal, who heads Brac Bank's Treasury and Financial Institutions division.

He is also frustrated not to see any indication of curbing the subsidised national savings certificates that are supporting mostly some well-off people at the cost of the financial market stability.

Income from all listed debt securities should be exempted from tax to popularise bond investing in Bangladesh without which the capital market would not go far, said Moniruzzaman, who is heading the leading merchant bank IDLC Investments Ltd.

"The cost of stock trading should be way lower if we mean for a liquid stock market," said Shakil Rizvi, and the Tk50 in advance income tax (AIT) on brokerage firms deducted at source against stock transactions of every Tk1 lakh is a big obstacle there.

"The National Board of Revenue can collect manifold revenue from the stock market if the revenue board helps the transactions grow to the levels our peer markets are observing," he added.

The opportunity to whiten black money through stock investments in the last budget helped the market and the government. The finance minister may reconsider extending the facility for the upcoming fiscal too, Shakil Rizvi suggested.