Bangladesh Budget 2010-2011 & Its Impact on Capital Market

“Bangladesh Budget 2010-2011 & Its Impact on Capital Market”

Introduction

Budget is a numerical expression of a plan. It is essential to every financial or nonfinancial institution. A govt. can not run without its budget. The govt. publishes its budget for every financial year. This budget directly or indirectly affects the capital market of that country. In this report We have analyzed the budget 2010-11 with a view to finding out the impact of budget on capital market.

Description

Budget-Definition A budgetis generally a list of all planned expenses and revenues. It is a plan for saving and spending. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms. It has to take account the institutional setting, national aspiration, economic environment within which it operate to attain the cherished objectives.

In summary, the purpose of budgeting is to:

Provide a forecast of revenues and expenditures i.e. construct a model of how our business might perform financially speaking if certain strategies, events and plans are carried out.
Enable the actual financial operation of the business to be measured against the forecast.

Government Budge

A government budget is a legal document that is often passed by the legislature, and approved by the chief executive-or president. For example, only certain types of revenue may be imposed and collected. Property tax is frequently the basis for municipal and county revenues, while sales tax and/or income tax are the basis for state revenues, and income tax and corporate tax are the basis for national revenues.

The two basic elements of any budget are the revenues and expenses. In the case of the government, revenues are derived primarily from taxes. Government expenses include spending on current goods and services, which economists call government consumption; government investment expenditures such as infrastructure investment or research expenditure; and transfer payments like unemployment or retirement benefits.

Budgets have an economic, political and technical basis. Unlike a pure economic budget, they are not entirely designed to allocate scarce resources for the best economic use. They also have a political basis wherein different interests push and pull in an attempt to obtain benefits and avoid burdens. The technical element is the forecast of the likely levels of revenues and expenses.

Therefore govt. budget should involve:

· A plan, setting out proposal and decisions of running out the finances of the govt.

· An authorization to raise the revenue and to incur expenditure.

· A forecast of the results expected on which to base future policy.

· An efficiency yardstick of what expenditure or revenue ought to attain successfully.

Bangladesh Govt. budgeting procedure

The annual budget is prepared by the Ministry of Finance and presented to Parliament for approval each year, except during periods of martial law, when the budget has been announced by the martial law administration.

The Constitution of Bangladesh, however, does not use the term budget. Instead, it uses an equivalent term ‘Annual Financial Statement’, which is to show the estimated receipts and expenditures of the government for a particular financial year.

Government budget in the country has two parts:

· Revenue and

· Development.

The former is concerned with current revenues and expenditures ie, maintenance of normal priority and essential services, while the latter is prepared for development activities. Formulation of the two budgets follows different procedures. Their financing pattern and the delegated authorities of incurring expenditure in different tiers in them are also different. Receipts in revenue budget are: domestic receipts (tax and non-tax); foreign grants; capital receipts (foreign loans); domestic capital (net of current receipts and expenditures in public accounts); extra-budgetary resources (debenture of autonomous bodies, their self-financing and accumulated balance, and materials at stock); and domestic loans and advances (net).

There are two constitutional part of the Annual F/S or the budget.

1. Consolidated Fund.

2. The Public Account Group- Fiduciary Fund.

These are not separate entities but are distinguished by differences in receipts and disbursements. The transactions in both heads represent inflows and outflows of funds from a single corpus known as the ‘exchequer’. The overall balance of the budget, its surplus or deficit, is represented by the difference between total receipts and expenditures of the Fund and Account together.

Consolidated Fund includes all receipts of the government, all loans and grants received from domestic and foreign sources and the recoveries of loans and interest thereon. All disbursements for both revenue and development heads are made from the Fund. A part of revenue expenditure is known as ‘Charged Expenditure’, which may be discussed in the parliament but voting is not required. Receipts in Public Accounts of the Republic represent the part of the exchequer, which do not constitute the Consolidated Fund. These relate mostly to transactions, in respect of which the government acts as custodian or banker in trust. These receipts include provident funds of government employees, post office savings deposits, various deposit accounts (local funds, judicial deposits, foreign aid deposits etc.), and adjusting heads like suspense and remittances. Some of these transactions are only book transfers. The expenditures comprise disbursements, which are set off against receipts and the difference between receipts and expenditures represents a net accretion or depletion to cash resources.

Stages of budget procedure in Bangladesh are preparation, approval, implementation, and follow-up. Policy components of the budget are: (a) fiscal measures or revenue policy; (b) expenditure proposed for basic functions of the government, i.e., revenue or current expenditure; (c) development or public investment, i.e., ADP; (d) money budget, commonly called credit and liquidity programme; and (e) authorization for implementation of these policies.

Finance division, ministry of finance is responsible for finalizing the budget documents encompassing all stages from collection, examination of ministerial submission and passage through parliament to final publication of it. Budget and development wings of finance division take care of revenue and development budgets respectively while the internal resources division prepares the taxation proposals.

The finance minister places the budget before parliament in June. It accompanies an introductory speech known as budget speech consisting of two parts. Part one deals with the overall financial and economic conditions prevailing in the country and government economic performance during the last one year and government economic plans and programmes and the budgetary allocation. Part two deals with taxation measures. After budget discussions, money bills, supplementary bill, and appropriation bill are placed before the parliament. If, for any reason, it is not possible to pass the appropriation bill within 30 June, a vote on account bill has to be placed before the parliament. Usually, through this bill an amount equivalent to two months expenditure is sanctioned.

Budget implementation also involves balancing of government incomes and expenditures. Measures for realization of income and its quantum and the direction of expenditure affect the economic life of corporate bodies, individuals and households of different income groups differently during the budget year.

Objectives of BD Govt. Budgeting

Revenue budget

Maintenance of essential services.
Food & fertilizer and distribution.
Macroeconomic balance & equitable distribution of income.

Development budget

It is involved in development activities.

Budget 2010-11

Bangladesh’s coalition government, led by the Awami League, on 10 June unveiled a 19 billion dollar national budget that calls for higher spending on energy, infrastructure and agriculture to revive economic growth.

‘In terms of overall priority, a wider agriculture sector is the major sector for economic development, but we are now confronted with a power and energy crisis which is impeding the investment environment in the country,’ Finance Minister Abul Maal Abdul Muhith said as he presented his proposed budget for 2010-11.

The energy-hungry country is to more than double its electricity production to 9,426 megawatts in the public and private sectors by 2015, he said. Bangladesh, which currently produces 4,200 megawatts, regularly suffers from power cuts.

The minister also set a 6.7-per-cent target for the gross domestic product in the coming fiscal year, which begins on July 1. GDP growth in the current fiscal year was 5.45 per cent, a seven-year low.

The government is hoping to substantially increase its revenues to more than 14 billion dollars so it can finance the proposed spending.

It also plans to borrow from external sources to cover a deficit of more than 5 billion dollars in the next fiscal year, according to budget documents presented to parliament.

Budget at a glance: SeeAppendix, Table 1.1

Budget in brief 2010-11

Total Expenditure: 1.321 trillion taka
Development Expenditure: 385 billion taka
Revenue Expenditure: 752.23 billion taka
Revenue Income: 928.47 billion taka
Revenue Surplus: 176.17 billion taka
GDP growth 6.7%
Inflation 6.5%
Export growth 15%
Import growth 16%
Remittance growth 14%
Investment as % of GDP 25.5%

Budget framework for 2010-11

Budget Estimation

This year’s budget has been prepared on the basis of certain assumptions contained in the medium term macroeconomic framework. Factors like global turnaround from the financial crisis, continued growth in agriculture sector and capacity to sustain domestic demand have helped us in making upward corrections to the economic growth in FY 2010-11. It is projected in the framework that our economic growth will be 6.7 percent in the next fiscal year. We hope that expected progress will be achieved by augmenting revenue collection, crowding in private sector investment through ADP implementation, expediting private sector investment through an increase in supply of credit for the private sector including PPP and making the external sector competitive through a stable exchange rate.

Revenue income

According to budget of FY 2010-11, total estimated revenue income will be Tk. 92,847 crore, which is 11.9 percent of GDP. Of this, the estimated NBR tax revenue will be Tk. 72,590 crore (9.3% of GDP). The estimated tax revenue from non NBR sources will be Tk. 3,452 crore and from non-tax sources Tk. 16,805 crore (2.6% of GDP).

Expenditure

In the budget of FY 2010-11, the total expenditure has been estimated at Tk. 1,32,170 crore. This is 16.9 percent of GDP and 19.6 percent higher than the revised allocation for FY 2009- 10. In the coming year, allocation for non-development budget stands at Tk. 93,670 crore (12.0 percent of GDP) and for ADP it is Tk. 38,500 crore (4.9 percent of GDP).

The non-development and ADP expenditure have increased by 14.2 percent and 35.1 percent respectively over the revised budget allocations for FY 2009-10. 15.4 percent of non-development expenditure is essentially development expenditure, which will be spent for various safety net programs undertaken for the ultra poor and various non-ADP development programs. Total development expenditure including the ADP and these development programs will be 6.8 percent of GDP.

Budget deficit and financing

Overall budget deficit will be Tk. 39,323 crore, which is 5 percent of GDP. The deficit will be financed up to Tk. 15,643 crore (2 percent of GDP) from external sources and Tk. 23,680 crore (3 percent of GDP) from domestic sources. Domestic financing includes Tk. 15,680 crore (2 percent of GDP) from banking sources and Tk. 8,000 crore (1 percent of GDP) from non-banking sources, the major portion of which will come from National Savings Certificates. Like in the previous years, this year also has preference to concessional external financing having fewer conditions.

Framework for ADP Allocation

Government has followed the same principle as we it done in the current year in determining the size of the next year’s ADP, keeping in focus our election commitments to ensure regional parity, improved infrastructure and quality of spending. In the proposed ADP, 21.2 percent is

allocated for overall agriculture sector (agriculture, rural development, rural institutions and water resources), 15.78 percent for power and energy, 15 percent for communication (roads, railway, bridges, river transport, civil aviation and tele-communication), 24.2 percent for human

resources (education, health, science and technology).

ADP Implementation

Finance minister mentioned in the last budget that the rate of implementation of ADP has not been encouraging. Though planning and budgeting has been decentralized under the MTBF, it has not been very effective. Keeping that in mind, he has mentioned that strengthening of budget and planning wings in line ministries/divisions will receive highest priority. 77 percent of ADP is being implemented by only 10 ministries. He convinced that rate of utilization could be higher had there been stronger monitoring. The Ministries, now, can spend allocated budget immediately after the budget is approved by the Parliament, and they have a tentative knowledge of what the size of resource allocation will be in the next 3 years. Therefore, they are now able to complete in advance many activities including the tender processes. Directives in this regard can also be issued to subordinate departments. They can also devolve the centralized decision-making process.

Overall Expenditure Framework

Now I would like to present a brief outline about the overall expenditure framework (non-development and development) of the proposed budget before this august House from which we can get a clear understanding about sector-wise allocation and priorities of the entire budget.

We may classify the ministries and divisions under three major categories depending on their allocation of business: social infrastructure, physical infrastructure and general service sector. In the proposed budget, 33.3 percent of total outlay has been allocated to social infrastructure of which, 23.9 percent is allocated to human development (education, health, science and technology and other related sectors). Allocation of 30.4 percent of total outlay has been proposed for physical infrastructure of which 16.9 percent goes to wider agriculture and rural development, 7 percent to overall communication sector and 4.6 percent to power and energy. 21.1 percent of total outlay has been proposed for general service sector that includes an allocation of 9.6 percent of total outlay for PPP projects, cash incentives for various industries and implementation of last year’s pay commission. Apart from these three major categories, the rest 15.1 percent will be spent for interest payment and net lending, wherein the share of interest payment is 11.1 percent.

A major portion of our domestic borrowing comes from the national savings schemes. We are aware that these schemes largely benefit the middle and low income families as social securities. We, therefore, support that the interest rate of these schemes be higher than those of other borrowing instruments. However, the interest rates of all the borrowing instruments should be harmonized. We expect to formulate an acceptable policy to rationalize the limit, amount and interest rates of borrowings.

Financial Sector

Reforms of financial sector

An efficient financial sector is a prerequisite for economic development. Keeping this in view, our govt. has taken a number of steps to reform this sector. Significant among these include automation of all activities of Bangladesh Bank in order to enhance its efficiency and to enable it to play a more effective role in the financial sector. As part of this initiative, connectivity has been established among all divisions/offices of Bangladesh Bank to set up interbank networking. The Credit Information Bureau of Bangladesh Bank has begun providing online services in order to effectively store data on the clients of banks and financial institutions. This year a new division called Banking and Financial Institutions Division has been created under the Ministry of Finance. Distribution of responsibilities between this division and other regulatory financial institutions (such as Bangladesh Bank, Securities and Exchange Commission (SEC) and Insurance Development and Regulatory Authority) is an ongoing process. In the next year, the

regulatory regime relating to banking and financial institutions will be reformed and rules governing SEC will be revisited in a bid to reform them also.

Strengthening Banking System

In order to raise the level of efficiency of the banking sector of Bangladesh to international standards by further strengthening of their activities and to make capital reserve more risk tolerant and stronger, Basel-1 along with Bassel-2 are being implemented. However, we have started implementing Basel-2 in its entirety since 1 January 2010. This will establish a direct linkage between risk management and risk-based capital adequacy requirement in the banking sector.

Another remarkable achievement in the banking sector development is establishing Bangladesh Development Bank Ltd. By unifying Bangladesh Shilpa Bank (BSB) and Bangladesh Shilpa Rin Shangstha (BSRS) as a specialized bank to provide loan facilities to industrial institutions and to assist in setting up new industries in our country.

Controlling Money Laundering

In order to make the program for prevention of money laundering more effective, Money Laundering Prevention Act 2009 and Antiterrorism Act 2009 have been enacted. By these Acts, Insurance Companies, Money Changers, Companies remitting and transferring money along with banks and financial institutions have been brought under the accountability regime of Bangladesh Bank. A Financial Intelligence Unit (FIU) has been established in Bangladesh Bank under the Money Laundering Prevention Act 2009. Memoranda of Understanding (MOU) have also been signed with seven countries for mutual exchange of information with foreign FIUs on cash smuggling and financial transactions.

Reforms in Insurance Sector

Insurance plays an important role in expanding trade and commerce in a country and reducing the risks related problems in people’s lives. For this purpose, a new law titled ‘Insurance Act 2010’ to update the ‘Insurance Act 1938’ has been enacted. In order to synchronize the activities of the existing ‘Insurance Department’ with Insurance Act, to maintain proper control and supervision of the sector, to protect the interests of policy holders and beneficiaries under insurance policies, to strengthen the financial base of insurance sector and to enhance the capacity to manage the sector, a law titled ‘Insurance Development and Regulatory Authority Act 2010’ has been enacted in Parliament. We will establish an ‘Insurance Development and Regulatory Authority’ very soon.

Reforms of Capital Market

Although capital markets of different countries of the world, especially New York, Tokyo, London, Mumbai and few others collapsed in the face of global recession, the capital markets of Bangladesh remained quite buoyant at that time. Market capitalization stood at 21.4 percent of GDP following keen interests showed by the investors in the capital market. By the end of April 2010, capitalization rose to 34.2 percent. By the end of April 2010, the number of BO (Beneficiary Owner) accounts has increased to 25,06,000.

Measures Undertaken

It cannot be denied that given the growing number of ordinary investors in capital markets, limited supply of securities and investors’ expectation for more profit at times makes the market volatile. Nevertheless, various steps have been taken to maintain market stability and to establish a transparent and vibrant capital market while deepening it. Market monitoring has been made stronger. Loan-margin has been refixed. Rules regarding the alternative evaluation procedure of shares i.e. Book Building method have been issued. Over-the-counter (OTC) market has been introduced in Dhaka Stock Exchange to transact securities of de-listed companies. Already, off-loading of shares of 5 state-owned companies has been completed. The divesting of shares of 26 companies is under way. A plan has been adopted to establish an institute titled ‘Bangladesh Institute of Capital Market’ to improve the institutional governance by enhancing capacity of investors, intermediaries and companies.

Investment

According to the report titled Doing Business 2009 published by the World Bank and the IMF, Bangladesh ranked 119^thin ‘Ease of Doing Business: Global Rank’ among 183 countries whereasIndia ranked 133rd. In the current year, the sign of our sliding from this position is a matter of concern Moreover; Bangladesh’s ranking is 20th in case of protection of investors. In addition, Bangladesh’s position is 71st in terms of receiving loans and 89th and 98th in terms of tax payment and business initiation respectively.

Income Tax: Capital market

Capital market is one of the vital and sensitive areas of economic development. On the eve of assuming office by the present Government, market capitalization in the stock market stood at Tk. 1042.97 billion which rose to Tk. 2557.47 billion on 31 May 2010. Our government is firmly committed to maintain a steady growth in and development of the capital market. Income earned by individuals through trading of shares of any listed company shall remain out of the purview of taxation.

Some new rate for imposition of tax at a lower rate

To impose tax at a concessionary rate of 10% on income of a company earned from trading of shares of listed companies in any stock exchange;
To impose tax at a concessionary rate of 5% on income of sponsor shareholders or directors of a company listed with any stock exchange; and
To impose tax at a rate of 3% on the premium value of shares of companies being sold at a premium value.

Conclusion

In this introductory chapter of my report I have tried to describe overall budgeting system of our govt. and Budget 2010-11 in a brief.

Findings of the Study

Introduction

There is no strategic shift in the budget for 2010-11 as the overall objective of the government remains the same, that is, acceleration of growth, creation of employment, faster reduction of poverty, reduction of all types of inequality and establishment of society based on social justice. Various macroeconomic and social targets have been reiterated in line with the manifesto of the ruling government. On the expenditures and income front, there is not much change as well. For example, total expenditure as percentage of GDP (gross domestic product) has not changed much. This also holds for annual development programme (ADP).

The income tax slab has not been changed for the last two years and this remains unchanged in fiscal 2010-11 as well. Here the issue of inflation rate has not been taken into consideration. And price hike erodes the income of the lower middle class with fixed income. Therefore, the limit of the threshold income should have been broadened. Some efforts to expand the tax net are observed in the budget. One such initiative is the imposition of tax on capital gains by the companies and by the sponsor shareholders or directors and on the premium value of shares. Given the emerging vibrancy of this sector, this sector has to be brought under tax as in other countries.

Description

In the FY2010-11 national budget, floatation of shares of some profitable companies through Initial Public Offer (IPO) along with several important reform measures initiated by the Securities and Exchange Commission (SEC) helped to regain investor’s confidence back to the capital market. The FY2010-11 national budget exempted the purchasers of listed equities of any queries as to the source of fund so long as purchased shares were not sold or transferred within two years of purchase. In addition, dividend-income tax was exempted and a new dividend distribution tax was imposed on the companies paying dividend.

Capital market related Income Tax

ü On capital gains in the share market, tax will be imposed on companies (10%), sponsor shareholders or directors of a company listed (5%) and premium value of shares of companies (3%)

ü Capital Gains of individual have been kept out of the net, for the time being, although amendments to the Finance Bill indicate that this is a possibility in future

Capital Market related priorities

Ø Institutional strengthening of SEC should receive priority attention

· No projects related to: strengthening of SEC’s surveillance and monitoring, operational restructuring (as is seen in case of India’s SEBI), strengthening research and monitoring capacity, broad-based consultation on major decisions, expansion of capital market educational programme

Ø Supply-side constraints should be addressed with more emphasis

· Announcement of issuance of proposed infrastructure bonds to raise equity for infrastructure related projects under BIIF (PPPs) – Good initiative

· No indication about off-loading of 26 SoEs (although mentioned earlier by the Hon’ble Finance Minster)

Ø Introduction of Capital Market Institution: welcome initiative: needs to get off the ground in a speedy manner

Share tax on institutions

The government has proposed, for the first time, a 10 percent tax on institutions that profit from share trade.

However, no taxes have been placed on the capital gains made by individuals — a much-debated issue that has had impacts on the market on many occasions prior to announcement of the budget for the fiscal 2010-11.

A 5 percent tax on the income made by sponsor shareholders or directors of listed companies has also been proposed in the new budget.

Also, the government considers imposing a 3 percent tax on the premium value of shares.

The budget further proposed tax at source on commissions received by the members of the stock exchanges. However, the rate was not mentioned.

The minister made it clear that the income earned by individuals through trading of shares of any listed company shall remain out of the purview of taxation.

A leading institutional investor however said the taxes on the income of a company from share trade “is not a welcome move”.

“To encourage more fundamental or long-term investment, the tax rate should be lower. If an institution makes profits within a year, the tax rate can be 5 percent. In case of investment for more than a year, the rate should be lower,” said Arif Khan, deputy managing director of IDLC Finance.

The 10 percent tax is too high. Without imposing taxes on capital gains, can use the capital market as a strong vehicle for infrastructure and industrial development.

The market capitalisation stood at 21.4 percent of GDP, following keen interest shown by investors, and by the end of April 2010, capitalisation rose to 34.2 percent.

By the end of April 2010, the number of BO (beneficiary owners) accounts increased to over 25 lakh. It cannot be denied that given the growing number of ordinary investors in the capital market, the limited supply of securities and investors’ expectation for more profit at times makes the market volatile. It should taken by the government to maintain market stability.

According to Finance minister, market monitoring has been strengthened; loan-margins have been re-fixed; rules regarding alternative evaluation procedure of shares, such as the book building method, have been formulated and an over-the-counter (OTC) market has been introduced at Dhaka Stock Exchange to transact securities of de-listed companies. Establishing the Bangladesh Institute of Capital Market is also under the government’s plan.

MCCI slates share tax on institutions

A leading chamber has slammed the government proposal to impose tax on the income of institutional investors in the stock market.

The Metropolitan Chamber of Commerce and Industry (MCCI) expressed dissatisfaction with the idea to slap tax on the income of sponsor shareholders or directors of listed companies, and on the premium value of shares.

“Imposition of tax on income of a company earned from trading shares is premature and counter-productive at a time when the capital market is still at a developing stage,” said M Anis Ud Dowla, president of the chamber.

The measures proposed for capital gains tax on transfers by sponsor shareholders are discriminatory and will discourage investment,

The imposition of tax on the premium value of shares is in effect a tax on raising capital and not profits, and will therefore be counter-productive.

The chamber, however, appreciated the simplification of price declaration procedure, VAT Act and rules. It also lauded the introduction of online VAT registration procedure and submission of returns. “However, imposition of VAT on any transaction not involving value addition, such as rentals on business premises is wrong, onerous and raises the cost of doing business,” it said.

There are several provisions for changes in tax administration. These ought to be reviewed in consultation with the stakeholders so as to eliminate harassment of taxpayers.

Volatility of DSE general index

Chart 3.1

From the chart 3.2, we can easily guess that every year the DSE index falls at the time of declaration of national budget. It performs well gradually after one or two months later.

Chart 3.2

In chart 3.1. We have analyzed the daily DSE index of 2010 till July. After analyzing we have concluded that DSE index is performing well after the declaration of this year’s budget. That means, this year budget does not make impact on capital market harmfully which was expected before budget.

Chart 3.3

Index Graph of Last 30 days from 21-07-2010 to 20-08-2010

From this graph we can see that market fallen down (after 1996) suddenly on 25 July. This happened cause of changing the margin loan. But after 25 July market regained and it is flourishing day by day dramatically. This performance is not good news for capital market. Experts said it will be harmful for new investors.

Market performance during the month of budget

Chart 3.4

After analyzing market index of the budget month I found that market fallen down before the declaration of budget. But after declaration of budget market is performing well. This happened because investors thought that govt. is going to impose tax on individual investors’ capital gain. But after declaration of budget investors realize that govt. will not impose tax on individual investors’ capital gain. So market has regained to some extent.

Market condition before budget

Dhaka stocks tumble on tax worries

Dhaka stocks tumbled on 8 June with the benchmark index shedding more than two per cent on worries that the government may impose a harsh five per cent tax on fat cat share traders.

The benchmark DSE General Index closed at 6067.43 with a fall of 2.05 per cent or 127.47 points, as major indices lost points. The broader All Shares Price Index (DSI) shed 1.98 percent or 101.26 points to end at 5001.07. After losing 2.03 per cent or 69.47 points, the DSE 20 index comprising blue chip shares ended at3347.41. The total turnover stood at Tk 16.0 billion, 4.5 per cent down from Sunday, and the total market capitalization reached Tk 2.56 trillion.

Dhaka stocks bounce back

Dhaka stocks bounced back on 9 June as the market shrugged off tax worries push–ing all the three indices up.

The market overcame the losses of the previous session riding on the gains of bank, fuel and power issues, non-banking financial institutions (NBFIs) and Grameenphone.

The shares prices plunged on 8 June over the news that the government might impose gains tax on the profit from stock trading. The DSE General Index surged by 1.79 per cent or 109.06 points to close at 6176.49.

Market condition after budget

Dhaka stocks gained more than one per cent on 13(Sunday), the first day of trading after budget as the investors brushed off fears that the proposed new tax measures would dent the market.

The Dhaka stock exchange authorities have branded the budget as anti-growth, saying that the hiked up commission on trading and taxes on companies and sponsors’ profit would affect earning.

But dealers said retail investors have largely ignored the gloomy forecast, driving all three gauges of the market to fresh highs, by snapping up stocks with strong fundamentals.

The DSE General Index, the main yardstick of the market, surged 1.16 per cent or 73 points to reach a fresh height of 6332.68, beating the mark set in the previous session.

Individual investors whose income has been left out of the tax-net gave a thumps-up to the budget. Institutional investors who are taxed heavily in the budget have yet to react to the government’s tax proposals.

Conclusion & Recommendation

Conclusion

Budget 2010-11 is a “pro-growth and pro-business”, but listed qualitative implementation of annual development programme is the “biggest challenge”.

Dhaka Stock Exchange came down hard on the budget, because of the proposed capital gains tax on institutional investors and tax at source on brokerage commissions would dent the growth of the share market. These proposals will seriously affect the market and derail its growth.

It will affect all including the fat cat traders and some 2.5 million individual investors. Everyone will have to bear the brunt as the government has hugely increased tax on commissions collected by the brokers. The brokerage houses will pass the tax burden on traders.

Presently, the brokerage houses collect Tk 0.04 as commission from every transaction worth Tk 100. They pay Tk 0.025 to the government exchequer and keep the rest.

The proposed tax rate of 0.1 per cent represents a 300 per cent hike, meaning the brokers will need to collect Tk 0.12 as commission on every transaction worth Tk 100. It is too high and will mainly affect millions of small traders.

Besides, it will derail expansion drive of the brokers. Many brokerages have planned to take their branches to the district towns. They may now rethink about their plans

We think the proposed tax on premium value of shares violates the country’s income tax laws, as “the premium value is a part of capital of a company not revenue”.

The tax on premium value would discourage the companies, which are planning to be listed on the exchanges.

The government could easily reduce its budget deficit to three per cent – instead of five per cent forecast in the budget by off-loading shares of state-owned enterprises. This will reduce the public deficit to a great extent, replenish the bourses with quality shares and stabilize the market. In 2008, the government raised more than Tk 20 billion from the capital market by off-loading SoEs’ shares.

Govt. must be appreciated for not making mentioning TIN mandatory while opening BO accounts and for not imposing tax on individuals’ capitals gain.

Recommendations

With regard to budget FY11, the apprehension is that realization of revenue targets and resource mobilization may be more within reach than the full implementation of the expenditure plan, in terms of quantity and quality However, some of the reform measures articulated earlier such as strengthening of regulatory reforms, BBBF, public expenditure reform, and civil service reform should receive due attention. These are critical to raising efficacy of public service delivery. Implementation of the budget proposals will hinge on significant improvement in the delivery capacity of the entire government machinery including various implementing ministries, institutions and agencies

Some recommendations related to capital market reforms:

The government might impose three per cent tax on capital gains of the institutional investors if they do not sell their shares within one year to encourage long-term investment and five per cent might be imposed on their income if they make profit by selling their shares before the one-year period.
Govt. should fix the tax on brokerage commissions at 0.035 percent instead of 0.1 percent.
5% tax on income of sponsor shareholders or directors of a company listed with any stock exchange should be reduced as they give income tax on their total income.
The government may reconsider the tax on premium value since this is not an income of the company but part of the equity.

Appendix Table 1.1

References

Ø The Monthly Economic Trend, June, 2010, Bangladesh bank.

Ø The Budget for FY-2010-11, Ministry of Finance.

Ø The Economic Review of Bangladesh, Ministry of Finance, Bangladesh.

Ø The Daily Financial Express, The daily star – English newspaper;

Ø Prothom Alo- Bangla newspaper;

Ø State of the Bangladesh Economy and Budget Responses 2010-11, CPD;

Ø Finance Minister’s Budget speech- (2010);

Ø Ministry of Finance, Bangladesh;

Ø www.banglapedia.com

Ø www.cpd.bd.com