Bavaria
JF-Expert Member
- Jun 14, 2011
- 53,097
- 53,478
Removal of Tax Exemption on DSE Listed Shares — an End to the nascent Capital Market?
Posted on June 12, 2016 by moremimarwa
Sometimes, at some level of a country’s development there has to be a careful balancing between a “small government” versus the need for private enterprise — where the private sector becomes the engine for economic growth and development. When the economy is relatively small and its markets and industries are still nascent there may be an argument for the increased role of the government to nurture and propel growth and prosperity — under such scenario, the government needs more revenue, but there has to be a good striking balance between the two.
In the past few weeks — I have been writing about possible financing strategies for our Five Years Development Plan (FYDP)-II; a vibrant capital market being a significant part to it. Then comes the 2016/17 budget speech, which, on one hand it appreciates the need to nurture the creation of a vibrant capital market that will be capable to finance the proposed FYDP-II; while on the other hand, the budget proposed specific measures that go against the spirit of enhancing the growth and vibrancy of the capital market. Rather, the proposed measures seems like will reduce the capital market into a small, thin and illiquidity with minimal possibilities of take off. I will explain:
In his budget speech the Honourable Minister for Finance and Planning says: “….The Government will continue to improve investment environment in the country in order to attract private sector to invest in our industries and other sectors. To facilitate this, the Government will improve services relate to accessibility of loans to private sector; enhance the capital market; strengthening coordination of public private partnership – PPP; improve doing business environment through various incentive packages and removal of red tape measures.” Based on this one will anticipate that there will be specific recommendation for “enhancing the capital market”. What comes next? The Minister continues: “I propose to amend the Income Tax Act, CAP 332 as follows: … (ii) To remove exemption on non-investment assets (shares), hence increase the tax base as the same item which enjoy a reduced rate of 5 percent on dividend. This will be done by deleting paragraph (d) under section 3 in the definition of “investment asset” on shares or securities listed in the Dar es Salaam Stock Exchange that are owned by a resident person or a non resident person who either alone or with other associate controls less than 25 percent of the controlling shares of the issuer Company”.
What the Minister introduces, in the case of removing exemptions is: (i) start charging capital gains tax on DSE listed securities; (ii) introduce a 10% withholding tax on DSE listed shares compared to the existing 5%; and (iii) introduce withholding tax on interest income from DSE listed bonds — both government bonds and corporate bonds whose maturity tenor is 3-years and above. For the purpose of this article i will focus on capital gains tax.
The Kenyan Minister of Finance, during his 2014/15 budget speech introduced capital gains tax on NSE’s listed securities, but it couldn’t work, immediately after the speech — investors refused to engage with the Kenyan capital market, the Nairobi Securities Exchange (NSE) lost investors’ worth by almost 40 percent within a space of few months from the effective date of implementation of the proposed tax which was January 2015, market activities and liquidity significantly slowed down (market slumped by more than 70% within the first month of the tax being introduced on January 2015) and investors exited the Kenyan market, opting for other portfolio investment destinations such as the DSE, as well as stock exchanges in Nigeria, Egypt, Mauritius, South Africa, and Morocco.
Additionally, the implementation and administration of this tax by the stockbrokers (who were to be the collecting agents of the tax) became a practical nightmare, and brokers protested it — as a result on September 11, 2015 the President of Kenya signed into law the Finance Bill (2015) abolishing the capital gains tax which was proposed at 5 per cent on all securities traded in the NSE, the law came into effect from January 2016.
The abolished capital gains tax restored back investors confidence, boosted trading in the exchange and positioned their country once again into being an attractive investment destination. Since then, the NSE retained its glory.
Now, let me reflect on the difference in size between the NSE and the DSE: NSE has been in existence since 1954; DSE started operations in 1998. NSE has 64 domestic listed companies; DSE has 17 domestic listed companies. DSE market capitalisation is about Tsh. 8.3 trillion; NSE market capital is equivalent to Tsh. 46 trillion. DSE market turnover (liquidity) is an average of Tshs. 750 billion per annum; NSE market turnover averages equivalent to Tsh. 3,500 billion per annum. DSE has 3 listed corporate bonds worth Tsh. 57 billion; NSE has 30 listed corporate bonds worth equivalent to Tsh. 1,640 billion. DSE listed government bonds are worth about Tsh. 5 trillion; NSE listed government bonds worth is equivalent to Tsh. 22 trillion. DSE has about 450,000 investors with CDS account; NSE has about 2,300,000 investors with CDS accounts.
These statistics clearly indicates that the NSE is far ahead to DSE. And I also think it is proper for Kenyan to have observed the wisdom of continuing to attract companies to raise capital through the NSE and encouraging both local and foreign investors to use the NSE for the savings and investment activities via fiscal incentives. Let me quote what the NSE CEO had to say upon President Kenyatta’s signing of the bill that abolished capital gains tax, he said: “this tax really affected our market in terms of interest from foreign investors. It has been disincentive. It sent a lot of jitters through the market.”
I joined the Dar es Salaam Stock Exchange in May 2013 — since then we have collectively managed to improve the market liquidity from the historical (for the past 15 years) market turnover averages of Tsh. 50 billion per annum, we are now at Tsh. 750 billion per annum and yes there has been an increase in prices of DSE listed securities, some counter have recorded capital gains of more than 5 times in a space of these past 3-years — which are relatively significant, I guess that’s why the government has now considered to charge taxes on these turnover. However as I indicated above, in terms of turn over — our market is still less than one-forth (or 25%) of the Kenyan market; but the Kenyan market decided that it is not wise or worth it for them to start charging such taxes on their Tsh. 3,500 billion market turnover. In their decision to scrap a tax that the same government introduced few months before, I guess was guided by factors such as the negative multiplier effect that will be created by a non-vibrant market versus the targeted revenue that the government may collect.
I am not certain as to whether rumours were on the air that the removal of tax incentives on the DSE listed securities was coming, because for the past 3-years, this quarter (April todate) is the worst recorded performing quarter in terms of liquidity and capital gains which informs market capitalisation. DSE quarterly trading turnover has been an average of Tsh. 200 billion for the past 3-years; however, April to date DSE turnover is less Tsh. 50 billion and we are only two weeks towards end of quarter. That says something.
Let me conclude by saying one of the major reasons for the establishment of the capital market in the country was to create an efficient financial system that will facilitate investment and financing of the businesses and government projects. To motivate the creation of a vibrant capital markets the government has been providing fiscal incentives to catalyze and encourage the use of the capital markets in mobilizing financial resources for onward investment in identified economic ventures of both public and private nature. As it is, our market is still relatively very small to consider revised the spirit of existence of these incentives. Listed companies can not be treated the same as non-listed, because, among other factors listed companies decided to share their prosperity with other many people in the society, they have opted to be transparent and comply to good governance principles, they easies tax administration work for our tax authority, they provide economic empowerment and wealth creation to many people in the society, they facilitate creation of employment — not only to their companies but for people working in the capital markets industry, etc.
I love this country as most of us do, I support austerity measures currently undertaken by the government. I want our government to increase its tax base for more revenue collection so that it can finance our infrastructure because its key to our envisaged industrialisation, economic transformation and human development. However, I also know that the local private sector can highly engage in building industries and related infrastructure projects if there are mechanisms that will enable them to raise long term capital. A vibrant and liquidity stock market is the tool to provide such sources of capital. The removal of fiscal incentives will not create a vibrant capital market. Let us re-consider our decision. I know the government has already planned and budgeted for this, but with proper consultations we can introduce a transaction based levy that will also be practically implementable for the easy of tax administration
Posted on June 12, 2016 by moremimarwa
Sometimes, at some level of a country’s development there has to be a careful balancing between a “small government” versus the need for private enterprise — where the private sector becomes the engine for economic growth and development. When the economy is relatively small and its markets and industries are still nascent there may be an argument for the increased role of the government to nurture and propel growth and prosperity — under such scenario, the government needs more revenue, but there has to be a good striking balance between the two.
In the past few weeks — I have been writing about possible financing strategies for our Five Years Development Plan (FYDP)-II; a vibrant capital market being a significant part to it. Then comes the 2016/17 budget speech, which, on one hand it appreciates the need to nurture the creation of a vibrant capital market that will be capable to finance the proposed FYDP-II; while on the other hand, the budget proposed specific measures that go against the spirit of enhancing the growth and vibrancy of the capital market. Rather, the proposed measures seems like will reduce the capital market into a small, thin and illiquidity with minimal possibilities of take off. I will explain:
In his budget speech the Honourable Minister for Finance and Planning says: “….The Government will continue to improve investment environment in the country in order to attract private sector to invest in our industries and other sectors. To facilitate this, the Government will improve services relate to accessibility of loans to private sector; enhance the capital market; strengthening coordination of public private partnership – PPP; improve doing business environment through various incentive packages and removal of red tape measures.” Based on this one will anticipate that there will be specific recommendation for “enhancing the capital market”. What comes next? The Minister continues: “I propose to amend the Income Tax Act, CAP 332 as follows: … (ii) To remove exemption on non-investment assets (shares), hence increase the tax base as the same item which enjoy a reduced rate of 5 percent on dividend. This will be done by deleting paragraph (d) under section 3 in the definition of “investment asset” on shares or securities listed in the Dar es Salaam Stock Exchange that are owned by a resident person or a non resident person who either alone or with other associate controls less than 25 percent of the controlling shares of the issuer Company”.
What the Minister introduces, in the case of removing exemptions is: (i) start charging capital gains tax on DSE listed securities; (ii) introduce a 10% withholding tax on DSE listed shares compared to the existing 5%; and (iii) introduce withholding tax on interest income from DSE listed bonds — both government bonds and corporate bonds whose maturity tenor is 3-years and above. For the purpose of this article i will focus on capital gains tax.
The Kenyan Minister of Finance, during his 2014/15 budget speech introduced capital gains tax on NSE’s listed securities, but it couldn’t work, immediately after the speech — investors refused to engage with the Kenyan capital market, the Nairobi Securities Exchange (NSE) lost investors’ worth by almost 40 percent within a space of few months from the effective date of implementation of the proposed tax which was January 2015, market activities and liquidity significantly slowed down (market slumped by more than 70% within the first month of the tax being introduced on January 2015) and investors exited the Kenyan market, opting for other portfolio investment destinations such as the DSE, as well as stock exchanges in Nigeria, Egypt, Mauritius, South Africa, and Morocco.
Additionally, the implementation and administration of this tax by the stockbrokers (who were to be the collecting agents of the tax) became a practical nightmare, and brokers protested it — as a result on September 11, 2015 the President of Kenya signed into law the Finance Bill (2015) abolishing the capital gains tax which was proposed at 5 per cent on all securities traded in the NSE, the law came into effect from January 2016.
The abolished capital gains tax restored back investors confidence, boosted trading in the exchange and positioned their country once again into being an attractive investment destination. Since then, the NSE retained its glory.
Now, let me reflect on the difference in size between the NSE and the DSE: NSE has been in existence since 1954; DSE started operations in 1998. NSE has 64 domestic listed companies; DSE has 17 domestic listed companies. DSE market capitalisation is about Tsh. 8.3 trillion; NSE market capital is equivalent to Tsh. 46 trillion. DSE market turnover (liquidity) is an average of Tshs. 750 billion per annum; NSE market turnover averages equivalent to Tsh. 3,500 billion per annum. DSE has 3 listed corporate bonds worth Tsh. 57 billion; NSE has 30 listed corporate bonds worth equivalent to Tsh. 1,640 billion. DSE listed government bonds are worth about Tsh. 5 trillion; NSE listed government bonds worth is equivalent to Tsh. 22 trillion. DSE has about 450,000 investors with CDS account; NSE has about 2,300,000 investors with CDS accounts.
These statistics clearly indicates that the NSE is far ahead to DSE. And I also think it is proper for Kenyan to have observed the wisdom of continuing to attract companies to raise capital through the NSE and encouraging both local and foreign investors to use the NSE for the savings and investment activities via fiscal incentives. Let me quote what the NSE CEO had to say upon President Kenyatta’s signing of the bill that abolished capital gains tax, he said: “this tax really affected our market in terms of interest from foreign investors. It has been disincentive. It sent a lot of jitters through the market.”
I joined the Dar es Salaam Stock Exchange in May 2013 — since then we have collectively managed to improve the market liquidity from the historical (for the past 15 years) market turnover averages of Tsh. 50 billion per annum, we are now at Tsh. 750 billion per annum and yes there has been an increase in prices of DSE listed securities, some counter have recorded capital gains of more than 5 times in a space of these past 3-years — which are relatively significant, I guess that’s why the government has now considered to charge taxes on these turnover. However as I indicated above, in terms of turn over — our market is still less than one-forth (or 25%) of the Kenyan market; but the Kenyan market decided that it is not wise or worth it for them to start charging such taxes on their Tsh. 3,500 billion market turnover. In their decision to scrap a tax that the same government introduced few months before, I guess was guided by factors such as the negative multiplier effect that will be created by a non-vibrant market versus the targeted revenue that the government may collect.
I am not certain as to whether rumours were on the air that the removal of tax incentives on the DSE listed securities was coming, because for the past 3-years, this quarter (April todate) is the worst recorded performing quarter in terms of liquidity and capital gains which informs market capitalisation. DSE quarterly trading turnover has been an average of Tsh. 200 billion for the past 3-years; however, April to date DSE turnover is less Tsh. 50 billion and we are only two weeks towards end of quarter. That says something.
Let me conclude by saying one of the major reasons for the establishment of the capital market in the country was to create an efficient financial system that will facilitate investment and financing of the businesses and government projects. To motivate the creation of a vibrant capital markets the government has been providing fiscal incentives to catalyze and encourage the use of the capital markets in mobilizing financial resources for onward investment in identified economic ventures of both public and private nature. As it is, our market is still relatively very small to consider revised the spirit of existence of these incentives. Listed companies can not be treated the same as non-listed, because, among other factors listed companies decided to share their prosperity with other many people in the society, they have opted to be transparent and comply to good governance principles, they easies tax administration work for our tax authority, they provide economic empowerment and wealth creation to many people in the society, they facilitate creation of employment — not only to their companies but for people working in the capital markets industry, etc.
I love this country as most of us do, I support austerity measures currently undertaken by the government. I want our government to increase its tax base for more revenue collection so that it can finance our infrastructure because its key to our envisaged industrialisation, economic transformation and human development. However, I also know that the local private sector can highly engage in building industries and related infrastructure projects if there are mechanisms that will enable them to raise long term capital. A vibrant and liquidity stock market is the tool to provide such sources of capital. The removal of fiscal incentives will not create a vibrant capital market. Let us re-consider our decision. I know the government has already planned and budgeted for this, but with proper consultations we can introduce a transaction based levy that will also be practically implementable for the easy of tax administration
