Capital gains tax on govt securities to hinder bond market development
Tax is proposed to be imposed on capital gains from the government securities - Treasury bonds and bills - in a fiscal year when investors have instead been expecting incentives.
The Dhaka Stock Exchange (DSE) is set to begin hosting exchange trading of the most important market instrument soon in a bid to develop the much-needed secondary bond market in the country.
We need to attract investors for the sake of creating a market that will allow issuers — the government, corporates, and others to collect money through bond issuance.
I am afraid the capital gains tax on Treasury bonds would discourage potential investors amid the fact that bond investment is comparatively less popular in the country.
Right now, local individuals do not need to pay any tax on capital gains from stocks and other listed securities. Why would they go for Treasury bonds?
The proposed capital gains tax will push government securities at a disadvantageous position as an asset class in the market.
No capital gains tax on Treasury instruments would encourage institutions to park their money in the government securities.
Banks, non-bank financial institutions, and insurers need to hold Treasury bonds to comply with their regulatory requirements and they need to apply on a prospective basis, not a retrospective basis if the gains tax is ultimately imposed.
Application of capital gains tax on government securities will discourage Primary Dealers and other government securities trading banks, who are taking the risk of holding the government securities at a lower yield and making a market for them and supporting the government to borrow efficiently.
This will discourage other investors who are willing to take exposure even at a lower yield, considering there is a potential to make some capital gain.
This will again discourage foreign investment in this segment, which has good potential.
I would also request to withdraw source tax on interest income/coupon from the government securities as they disproportionately affect the ultimate owner of the security.
Md Shaheen Iqbal is the DMD, Head of Treasury & FI, Brac Bank Ltd President, CFA Society Bangladesh