Budget may offer major tax breaks for capital market

Infographic: TBS

The upcoming national budget for FY2025–26 is expected to feature significant tax relief measures aimed at revitalising Bangladesh's capital market, which has been struggling amid weak investor confidence.

According to finance ministry sources, Finance Adviser Salehuddin Ahmed will present the interim government's budget proposal on Monday. Key proposals may include widening the corporate tax gap between listed and non-listed companies to 7.5% (from the current 5%), reducing advance income tax (AIT) on securities trading from 0.05% to 0.03%, and lowering the corporate tax rate for merchant banks by 10 percentage points to 27.5%.

Saiful Islam, president of the DSE brokers association (DBA), told TBS, "We sincerely appreciate the incentives outlined in the budget. We would like to express our heartfelt gratitude to the chief adviser, finance adviser, special assistant to the chief adviser, chairman of the National Board of Revenue (NBR), and the Bangladesh Securities and Exchange Commission (BSEC). We firmly believe that these proposed incentives and concessions will significantly contribute to the growth of the Bangladesh capital market."

Reacting to the expected proposals, Minhaz Mannan Emon, a shareholder director of the Dhaka Stock Exchange (DSE), said that the implementation of these tax measures could restore investor confidence in the interim government, which was formed following student protests.

He added that lowering the AIT on securities trading would stimulate market transactions, and cutting corporate tax for merchant banks would encourage investment in the sector and strengthen the financial capacity of these institutions.

Minhaz Mannan also said that earlier initiatives by the BSEC— such as allowing brokers to use interest from client accounts and reducing BO (Beneficiary Owners) account fees — have already set a positive tone for retail and affected investors.

However, former BSEC chairman Faruq Ahmad Siddiqi offered a more critical view. He argued that the proposed incentives would mainly benefit brokerage firms and merchant banks rather than general investors.

"Reducing turnover tax will mostly help large investors. Even when the tax gap between listed and non-listed firms was 10%, not a single major company came to the market. Bringing it down to 7.5% won't change that," he said.

Instead, he emphasised the need for strong legal enforcement: "Laws exist in the country, but they are not implemented. That's the core reason behind the current state of the capital market. If legal compliance is ensured, all stakeholders — including retail investors — will benefit."

Corporate tax gap

In a bid to encourage companies to get listed on the struggling stock market, the government is planning to widen the existing 5% corporate tax gap between listed and non-listed firms to 7.5%, and to ease the transaction conditions currently required to enjoy the reduced tax rate.

Currently, listed companies enjoy a corporate tax rate of 20%, but due to strict conditions, many companies fail to qualify for this rate and end up paying 22.5%. Similarly, although the corporate tax rate for non-listed companies is 25%, they often end up paying 27.5% due to failure to meet requirements.

Finance ministry sources said that in the upcoming budget, the corporate tax for non-listed companies will be set at 27.5%. At the same time, conditions for listed companies to enjoy the 20% rate will be relaxed, resulting in a tax gap of 7.5% between the two groups.

Speaking to TBS on condition of anonymity, a senior finance ministry official said, "Currently, to qualify for the 20% tax rate, listed companies must ensure that all earnings, expenditures, and investments are conducted through banking channels. In practice, companies often cannot comply with these requirements and hence cannot avail the reduced rate."

"In the upcoming budget, only earnings will need to go through banking channels, while the banking condition for expenditure and investment may be lifted. As a result, more companies will be able to enjoy the 20% tax rate," he added.

Reduce AIT on securities turnover

The government is likely to reduce the AIT on securities trading, widely known as turnover tax, to 0.03% from 0.05%, which may help to cut the tax burden of the brokerage firms.

According to industry insiders, the turnover tax was initially set at 0.015% in 2005. In July 2009, the government increased it to 0.025%, followed by further hikes to 0.05% in July 2010 and 0.10% in July 2011. However, after the stock market crash, the rate was revised downward to 0.05% in October 2011, where it has remained since.

Commenting on the turnover tax, Ashequr Rahman, managing director of Midway Securities, said, "We had proposed a turnover tax of 0.02–0.025%. However, the rate currently being proposed is still a positive step. It's encouraging that the government has listened to our concerns."

Tax cut on merchant bank

According to finance ministry sources, the upcoming budget is expected to propose reducing the corporate tax rate for merchant banks from 37.5% to 27.5%. This has been a long-standing demand of the Merchant Bankers' Association, as merchant banks have faced the highest corporate tax rate among market intermediaries. In contrast, brokerage firms and asset management companies currently pay a 27.5% corporate tax.

There are currently 66 merchant banks in the country, around 60% of which are subsidiaries of banks and non-bank financial institutions.

Commenting on the matter, Syed M Omar Tayub, managing director and CEO of Prime Bank Investment, said, "The proposal to reduce the corporate tax rate for merchant banks is very welcome. There has long been an uneven playing field among market intermediaries, and this move would help level it."

He said, "Lowering the tax rate will encourage more investment from the promoters of merchant banks. Banks currently have to pay higher taxes on their profits. However, if these profits are generated through merchant banks, the tax burden is significantly lower. As a result, banks are likely to become more interested in using merchant banks to channel their investments through bonds, taking advantage of the lower tax rate." 

This will boost the activities of merchant banks and provide banks with a viable alternative income stream, he added.