Govt. isn’t bothered about capital market, analysts say

The present government unlike the last isn’t bothered about the capital market. Look at all the recent taxes in the budget and you’ll know this to be true.

Industry experts, analysts, et-all say that unclear policies and regressive taxation by the government implies only this – that in the government’s list of priorities, the development of the capital market is at the bottom end.

What is bothering most of them is that there’s little clarity in the proposals and many grey areas, but interestingly they all agree that whichever way you ‘spin it,’ the proposals are negative.

At this point in time, there’s extensive lobbying by the industry to the Treasury, officials said. “We want the Treasury to leave the taxes as they are,” a CEO of an asset management firm dealing in debt instruments such as debentures and bonds told the Business Times. On these debt instruments, the Withholding Taxes (WHT) was raised to 14 per cent from 10 per cent. This, the CEO argues, means that the savings accounts’ WHT is at 5 per cent which will not attract investors to debt. “Who will now in invest in debentures?”

It’s another story on Unit Trust (UT). The budget proposal says that due to the exemption on investment income, the increased share of economic activity in the country is not under the corporate income tax leading to the erosion of the corporate tax base. Therefore, a proposal removing the exemptions applicable on the income from the investment on listed securities, Dividends, Unit Trust and other instruments was made.

The budget says that the present exemption on dividends received by unit holders of Unit Trusts and Mutual Funds will be removed for corporate sector. There’s no specific mention of capital gains arising from investments in unit trusts.

For a fixed income unit trust (some of which may only pay modest dividends), the capital gain may be larger than the dividend and this is a grey area. Data shows that the recent growth in unit trusts has been in fixed income space as opposed to equity, driven by certain large corporates.

Next Thursday, officials of the Securities and Exchange Commission (SEC) and the Colombo Stock Exchange are slated to meet Treasury officials on the UT and capital gains issue. Let’s hope that something comes of it.