CGT on share transactions plummet amid market downturn

The Nepal Stock Exchange (Nepse) index has been enduring a prolonged period of decline over the past two years.

The benchmark index soared to an all-time high of 3,198.60 points on 18 Aug 2021. But now, two years later, the Nepse index languishes below the 1,900-point threshold. Daily transactions on the exchange reached Rs 21.64bn on that record-breaking day in August 2021. It plummeted to just above Rs 1bn as of Tuesday. Moreover, the total market capitalization—the total worth of shares listed on the secondary market—has declined from Rs 4.46trn in Aug 2021 to slightly over Rs 1trn on Tuesday. This substantial decrease equates to a loss of Rs 3.5trn in the value of listed shares over just two years, resulting in significant losses for investors.

However, it’s not just investors who have suffered losses; government revenue from the stock market has also seen a considerable drop during this period. According to data from CDS and Clearing Limited, the government collected Rs 14.13bn through capital gains tax (CGT) on share transactions in 2020/21. Such collection decreased to Rs 10.35bn in 2021/22 and further to a mere Rs 2.97bn in 2022/23. The government levies a CGT of 5 percent on profits from shares held for more than a year and 7.5 percent on those held for less than a year. The rates for institutional investors go as high as 10 percent.

Data provided by CDS & Clearing Ltd shows the government’s CGT revenue from share transactions grew from Rs 500.76m in 2017/18 to Rs 61.2m in 2018/19 and reached Rs 98.52bn in 2019/20. During the bull market, rising share prices led to increased investor profits, resulting in higher CGT revenue. However, with most investors now facing losses on share transactions, CGT revenue collection has suffered.

The benchmark Nepse index has been on a consistent downward trajectory since reaching its all-time high of 3,198.60 points on 18 Aug 2021. According to the stock investors, the stock market is not reviving because of the central bank's policy of capping mortgage loans. In the Monetary Policy for Fiscal Year 2022/23, the central bank said that investors could avail margin loans of up to a maximum of Rs 40m from one financial institution and Rs 120m in total. This provision compelled investors to settle loans exceeding the new ceiling, creating selling pressure on the market. This ultimately caused the stock market decline.

Although the central bank has recently relaxed this provision, allowing investors to avail margin loans of up to Rs 150m and institutions to avail loans of up to Rs 200m, it has failed to boost investor confidence. Market participants are advocating for the complete removal of the loan cap altogether.