Storm as experts reject withdrawal of exemptions
A storm is brewing in Tanzania following a proposal to introduce new taxes on the banking sector and stock market.
Presenting the Tsh29.5 trillion (US$13.43 billion) budget for the 2016/2017 fiscal year, Finance and Planning Minister Phillip Mpango sparked debate when he proposed revocation of tax exemptions on the 20-year old Dar es Salaam Stock Exchange (DSE) with the aim of expanding the country’s tax base.
In the proposal, the government seeks to remove tax exemptions on shares and bonds. This is to be done by scrapping Paragraph (d) under Section 3 in the definition of investment assets on shares or Securities listed on the DSE.
The government also plans to introduce VAT of 18 per cent on bank fees on transactions and 10 per cent excise duty for sending and withdrawing money through mobile phones.
Market experts, however, argue that such moves will have a negative impact on the growth of the banking sector and capital market.
“The proposed tax measures on profits from sales of shares and bonds could discourage investors,” says Dhow Financial CEO Mohamed Warsame.
DSE has about 200,000 members who enjoy zero taxation on their share transactions. If the government’s proposed taxes are adopted, all shares traded at the DSE will be taxed.
“Introduce capital gains tax on DSE and the bourse will suffer,” says Warsame. He gives the example of Kenya where a similar tax was introduced on the Nairobi Security Exchange (NSE), only to be revoked three months ago owing to its failure to produce expected results.
According to Warsame, it’s too early to introduce such a tax given the bourse’s liquidity position and market capitalisation.
“After all, how much will the government get out of capital gains tax on the exchange? Let’s be patient until our exchange activities deepen,” says Warsame.
Warsame is not the only one who thinks the proposed taxes are ridiculous.
Raphael Masumbuko, Zan Securities chief, says the proposed capital gain tax at the bourse is simply intolerable.
“Should it see the light of day, it would be a huge setback for the bourse that currently struggles to educate and raise awareness in society on the importance of investing in shares,” says Masumbuko. “The reason the government waived the same in the first place should hold.”
The zero capital gain tax on DSE was introduced as an incentive to attract more investors as opposed to 10 per cent for unlisted companies.
The proposed capital gain tax for foreign investors is 20 per cent and 10 per cent for domestic investors. This, experts argue, could discourage investors who may consequently opt for other bourses in the region.
Masumbuko argues that the new tax measure will cut government’s revenue owing to business decline at the bourse.
Similarly, the Tanzania Stock Exchange Brokers Association (TSEBA) has called on the government to reconsider its new tax measures.
“It is important to underscore the benefits that have been realised as a result of the introduction of tax incentives for listed companies,” says George Fumbuka, TSEBA chairman, in a petition to the government.
TSEBA’s position is that the DSE is still young and therefore requires incentives that would nature its growth so as it can play an important role in the provision of financing for current and future development initiatives.
The government currently provides a number of tax incentives in its efforts to nature the growth of DSE. These include reduction on withholding dividends whereby listed shares attract five per cent tax compared to 10 per cent for non-listed shares.
TSEBA’s sentiments were echoed by the Confederation of Tanzania Industries (CTI), which also warned that capital gains tax will dissuade local and foreign investors from trading at the bourse.
“We risk losing investors because we are the only country that has come up with this kind of tax measures in the region,” warns Samuel Nyantahe, CTI chairman, adding that the new taxes could equally stall growth of the manufacturing sector.
“The new measures are also likely to derail financial inclusion efforts,” says Warsame, arguing that extra taxes on banks could push up the cost of services at a time when a better percentage of Tanzanians are still unbanked.
Additionally, the proposed 10 per cent duty on mobile money transactions will have far reaching implications for rural residents who mainly perform small transactions.
“It will reduce the amount of money transacted as both the sender and the receiver will now pay 10 per cent on every transaction made over the mobile phone platform,” says Warsame.