High dividend tax frustrates stock market investors

Investors and market participants have expressed frustration over the lack of rationalisation in the high dividend tax for listed companies in the proposed budget, particularly affecting wealthy individuals who face a steep 40.5% tax on dividend income.

Despite assurances from Anisuzzaman Chowdhury, special assistant to the chief adviser, that the government would address concerns over equity selling pressure during dividend seasons, no changes were introduced in the budget.

Saiful Islam, president of the DSE Brokers Association, voiced disappointment but remained hopeful: "We expected a revision, but the issue was overlooked. We urge the government to reconsider before the final budget approval later this month."

Why high dividend tax hurts the market

Bangladesh's stock market remains speculation-driven rather than fundamentals-based, partly due to unfavourable tax policies, said Md Moniruzzaman, CEO of Prime Bank Securities.

Capital gains are taxed at 15%, while wealthy investors (net worth over Tk50 crore) pay 40.5% on dividends.

This disparity encourages speculation over long-term investment, distorting market stability.

"Why would wealthy investors prefer dividends when capital gains offer a lower tax burden?" Moniruzzaman questioned. "The current system discourages dividend culture, hurting general shareholders."

Due to the high tax burden, sponsor-directors of listed firms often avoid substantial dividend payouts, depriving minority shareholders. Except for a few multinationals and blue-chip companies, dividend payouts remain disappointingly low in Bangladesh's market.

Call to reform dividend taxation to strengthen capital market

Abdul Kader, a tax expert at LankaBangla Securities, pointed out that corporate shareholders currently pay a 20% tax on dividends, while wealthy individual investors are subject to an effective tax rate of 40.5%. He noted that such a policy structure discourages wealth retention and potentially undermines broader participation in the capital market.

Under the current dividend taxation framework, individual investors are taxed based on their respective income slabs, which range from 0% to 30%. However, a minimum 10% source tax is applied even to those who fall within tax-exempt brackets. For individuals without a Taxpayer Identification Number (TIN), the withholding tax rate rises to 15%.

High-net-worth individuals – defined as those with a net worth exceeding Tk50 crore – face an additional 35% surcharge on their payable tax, pushing their effective tax rate on dividend income to 40.5%. This steep rate has raised concerns about the fairness and efficiency of the tax regime, especially when compared to other forms of investment income.

In response to these concerns, the DSE Brokers Association has proposed capping the dividend tax at 15%, aligning it with the capital gains tax rate. The aim is to establish a more balanced and investor-friendly tax structure that encourages long-term investment in the equity market.

Market experts argue that a more moderate dividend tax rate would not only provide relief to investors but also contribute to the overall health of the capital market. "Sacrificing some tax revenue now could foster a stronger, more stable capital market – yielding higher returns in the long run," they suggest.