Regulator positive on removal of Capital Gains Tax on stocks

The government is likely to stop the imposition of the Capital Gains Tax on the stock market, while reinstating the share transaction levy, the country’s capital market regulator said. “We have made representations to the Prime Minister to remove the Capital Gains Tax from the Colombo Stock Exchange, and I’m positive that it will be removed,” Securities Exchange Commission Chairman Thilak Karunaratne said.

He noted that the current state of the economy and the ratings downgrades, caused by the economic mismanagement of the previous regime, have justified that the government taking extreme measures to correct the situation. “With these kinds of ratings, investors will not come to Sri Lanka,” he said. However, Karunaratne added that some tax revisions, such as the Capital Gains Tax, may have gone a step too far in the context of the Colombo Stock Exchange (CSE), as trading will decline severely.

Prime Minister Ranil Wickremesinghe pushed for the Capital Gains Tax—taxes on profits realized from the sale of assets— saying that 80 percent of the population is paying more taxes than the top 20 percent who own 80 percent of the capital in the country. However, Wickremesinghe has also consistently called for the middle class to become active in the stock exchange. Currently, only 5 percent of the country’s adult population has Central Depository System (CDS) accounts required for trading, and only 10 percent of that is active. “In the stock exchanges of Malaysia, Thailand, Hong Kong and Singapore, Capital Gains Tax is zero. In Indonesia it’s 0.1 percent.

In Japan there’s 10 percent and in the US there’s taxation in the short term and a 0-20 percent taxation in brackets for the long term, but they are mature markets,” Karunaratne said. He noted that the timing is also unfavourable, being imposed at a time when the CSE has fallen 12.6 percent year-to-date, requiring the enforcement of optimistic policies to boost confidence, and let the bourse grow from the current capitalization of 26.5 percent of the gross domestic product (GDP). “Currency depreciation, questionable market policy decisions brought by the previous government and tightening of US Fed policies which have moved funds to their securities have kept our market cap to GDP below 30 percent.

So there’s tremendous scope and space for improvement,” he added. Karunaratne noted that the government could create some medium term space with assistance from the International Monetary Fund, and other multilateral organizations, instead of imposing draconian measures, which will further aggravate the situation. He added that the government is likely to reinstate the share transaction levy which was removed in the 2016 budget, in lieu of the Capital Gains Tax. “No one asked to remove the share transaction levy. It contributes around Rs. 1.3 billion to government revenue, and that can be paid. I’m fairly confident that the government will accept our requests,” he said.

Increase in IPOs anticipated

The CSE is likely to see an increase in initial public offerings (IPOs) due to the current economic environment, Karunaratne speculated. “With interest rates going up, there will be an increase in IPOs. We will expect people to look at the Colombo Stock Exchange and look for IPOs instead of looking to borrow money at high costs. Listing can bring cheap funds to a business,” he said.

However, rising rates may also motivate investors to move away from riskier stock investments to park funds in securities and deposits. Due to pressures from the external front, the Central Bank increased policy rates by 50 basis points mid- February. While the Central Bank did not change policy rates in the March monetary policy, the Central Bank Governor had not ruled out further rate hikes in future. Commercial banks had raised rates months in advance of the February rate hike, and have been observed increasing rates again recently. Karunaratne noted that fund raising has predominantly been debt in nature, with banks extending Rs.3.45 trillion in credit for 2015, compared to Rs.109 billion in funds raised through the CSE.

Listing requires companies to adhere to many regulations. However, the CSE has expressed its intention in opening a small and medium enterprise board with looser requirements. Further, Karunaratne said that the SEC is reviewing the rules and regulations of the bourse, as some companies have delisted or announced their intentions to delist due to unfavourable regulations. The government recently pledged to exit investments in several state-owned companies and introduce them to the CSE. Karunaratne said that he has also requested the government to at least partially list state-owned enterprises— particularly Bank of Ceylon, People’s Bank, National Savings Bank, Sri Lanka Insurance Corporation and SriLankan Catering.