Capital Gains Tax to hit CSE?

• Rs. 350 b in value wiped off stock market so far this year 

• CSE not consulted before directive, stock market officials surprised

• Questions why Share Transaction Levy retracted if replaced with Capital Gains Tax 

• Tax expert says positive move to strengthen public revenue 

By Shehana Dain

An already-dampened Colombo Stock Exchange (CSE) could be severely hit if an unforeseen directive to impose the Capital Gains Tax is implemented by the Government after a hiatus of 29 years, a senior official warned yesterday.

CSE Chairman Vajira Kulatilaka told the Daily FT that the perceived impact of capital gains tax after many years of absence would be far larger than the actual impact, likely resulting in a further decline of trading activities on the Bourse.

“People will definitely have a negative perception of this and that impact is going to be larger than the real impact of the tax and how much people will be taxed due to this,” he stressed.

On Friday (4) due to continual pressure to promote fiscal consolidation the Cabinet held a special meeting and approved new tax reforms. The possible reintroduction of the Capital Gains Tax after three decades was the highlight of the meeting.

The move came as a surprise in the backdrop of Bourse earnings dwindling over the past few months. CSE’s market capitalisation as of last week amounted to Rs. 2,588 billion, down by 12% from Rs. 2,938 billion as at end 2015. The All Share Index and S&P SL 20 Index were down by 12% year-to-date as well.

Noting that Cabinet did not consult CSE officials before taking a decision which would directly impact the stock market, Kulatilaka said more clarity on this issue was needed without further delay.

“It was quite a surprise for us actually. They should not keep us in the dark and we cannot expect the CSE to calm down and trade as they are already distressed with the way markets are behaving. They should have also publicised the rates and the duration for which capital gains will be taxed,” he asserted.

Meanwhile, he questioned why the Government removed the Share Transaction Levy, which traders and investors were already familiar with, if they were planning to introduce the Capital Gains Tax. “We were happy about the Share Transaction Levy being removed recently from the Budget but now with the Capital Gains Tax, we are back to where we started or even worse; now we will have to wait and see.”

Kulatilaka pointed out that liquidity had been a significant issue for the CSE and enforcement of the new policy could starve the stock exchange of much-needed funding flow.

“The stockbrokers are very dissatisfied with this move. In addition we all know how our stock market is faring. How will positivism spread with such situations occurring? I’m aware of the budget deficit problems the country is facing, however massive capital gains being available to be taxed right now is also questionable,” Kulatilaka opined.

However, a tax expert speaking on condition of anonymity told the Daily FT that from a social inequity point of view, the Capital Gains Tax should be re-introduced into the tax system.

“The Government has to tap all of its resources to meet its revenue targets because right now we have no other choice. In my opinion Sri Lanka has one of the most liberal tax systems in the world. The stock market was given a long grace period without this tax and therefore I won’t buy that it would be the sole reason to deprive stocks further. However I agree that the Government should have kept the Share Transaction Levy if it was going to come up with this as the impact would be less,” the industry expert said.