Dividend tax slashed, listing threshold axed to ignite capital market

The government has unveiled one of the most comprehensive fiscal packages for Bangladesh's capital market in recent years, cutting taxes on dividend income, removing investment limits for mutual fund tax rebates and easing listing requirements in a bid to attract fresh investment and deepen the market.

The reforms, incorporated in the finance bill passed in parliament today (29 June), are expected to benefit retail investors, institutional investors, asset managers and companies seeking to raise funds through the stock market.

At the heart of the reforms is a major overhaul of dividend taxation, a move designed to encourage a long-term, dividend-centric investment culture. 

Under the new law, the tax rate on dividend income for individual retail investors has been slashed to a flat 15%, which will now be treated as a final tax liability, according to the official of the National Board of Revenue (NBR). 

Previously, while tax was deducted at source at 10-15%, investors were often subject to additional payments during their final income tax assessments based on their respective tax slabs. This complexity often led to higher effective tax burdens and discouraged investors from holding high-yield stocks. 

By making the 15% deduction final, the government has simplified the process and increased the "take-home" returns for ordinary shareholders, said a senior officer of an asset management company.

Corporate investors have also received a reprieve, with the tax rate on their dividend income lowered to 20%. This provides a massive sigh of relief for market intermediaries such as merchant banks and brokerage firms, who were previously facing corporate tax rates as high as 37.5% on their dividend earnings. 

Earlier, the finance minister withdrew the 20% tax on dividend income for corporate in his budget proposal. Following the criticism over this issue, he scrapped the decision.

Furthermore, all income derived from zero-coupon bonds will remain 100% tax-free, ensuring that fixed-income instruments remain a competitive component of a diversified portfolio.

The mutual fund industry, which has long struggled under restrictive investment caps, is set for a major revival as the government has completely scrapped the Tk5 lakh investment ceiling required to qualify for tax rebates. 

Industry insiders believe this is a game-changer that will allow larger pools of institutional and individual capital to flow into the asset management sector. 

Shahidul Islam, chief executive officer of VIPB Asset Management Company Limited, told TBS that this change is one of the most awaited reforms for the industry. 

He noted that the withdrawal of the threshold, combined with the new dividend tax structure, will significantly boost investor appetite for mutual funds.

For corporate entities, the budget has introduced a "triple-tier" incentive structure that could reduce a company's tax burden by up to 7.50%. In a fundamental departure from previous policy, the government has removed the mandatory requirement to offload a minimum of 10% shares to qualify for a listing tax rebate. Now, any company can enjoy an immediate 2.5% corporate tax cut simply by joining the stock exchange. 

To encourage greater public ownership, an additional 2.5% rebate is offered if a company offloads 10% or more of its shares. A final 2.5% "transparency rebate" is available to any firm – listed or non-listed – that executes all business transactions through banking channels.

Salim Afzal Shawon, head of research at BRAC EPL Stock Brokerage, described these measures as a clear signal of the government's positive intentions. He emphasised that the cumulative tax benefits would make public listing an irresistible proposition for many top-tier private firms. 

Adding to this sentiment, Ashequr Rahman, managing director of Midway Securities, noted that the simplification of dividend tax assessments removes a significant layer of mental and financial "hassle" for the investing public.

Thanking the government and NBR for the reforms, Minhaz Manna Emon, a shareholder director of the Dhaka Stock Exchange (DSE), observed that previous administrations failed to understand how small fiscal friction points could undermine the foundation of the stock market. 

"This budget treats even the smallest issues with great importance," Minhaz said. 

"The structural changes to the tax framework will create a sense of comfort and trust among investors. By removing the Tk5 lakh cap on mutual funds and lowering the dividend tax, the government has effectively widened the doors of the market, ensuring that small and large investors alike can participate with renewed enthusiasm."