Capital Gains Tax to Be Declared Final Tax, Investors Demand in Upcoming Budget

May 25, Kathmandu – Expectations surrounding the capital market are hopeful that they will be addressed in the budget, but a tradition of ineffective implementation has persisted for years. As the budget release date of June 1 approaches, anticipation from the stock market has risen once again.

The share market typically shows a positive reaction a few days before the budget announcement; however, the market’s demands are often unmet or remain unimplemented, causing any growth to be short-lived.

This time, investors are suggesting that a long-overlooked issue be included in the budget—the current capital gains tax on share trading should be declared as the final tax. Tulsi Ram Dhakal, Chair of the Nepal Investors Forum, stated, “Every year, the budget creates tension among investors regarding capital gains tax. The existing capital gains tax should be officially declared as the final tax in the budget.”

Stakeholders attest that even the announcement of this issue in the budget would elicit an almost immediate positive market response. Former President of the Stock Broker Association of Nepal, Bharat Ranabhat, remarked, “If the budget clearly addresses capital gains tax as the final tax, it will eliminate uncertainty around taxation and the market will promptly respond.”

Currently, while capital gains tax on share transactions is effectively treated as a final tax, there has been no official policy declaration. Consequently, this issue has sporadically become contentious.

Previously, a provision in Article 29 of the Fiscal Year 2023/24 Economic Bill created significant upheaval in the capital market when Prakash Sharan Mahat was Finance Minister.

The provision aimed to tax share transactions under income tax laws, an attempt to increase transparency, but widespread opposition caused trading to halt.

On June 4, 2023 (June 21, 2080 BS), a written agreement was made between investors and the Ministry of Finance to treat capital gains tax on share trading as the final tax; however, policy responsibility was never fulfilled.

In September 2023, a high-level tax reform advisory committee recommended taxing share income under the Income Tax Act as of July 17, 2024, implying that annual profits from share trading would be taxed at income tax rates, up to 39 percent.

This provision reignited fear in the capital market, prompting investors to demand a definitive policy resolution.

Investors currently pay 7.5 percent capital gains tax on holdings held for less than one year and 5 percent for those held over a year.

“By restructuring NEPSE and bringing in foreign strategic partners, international-grade technology will be introduced, trading tools enhanced, transparency improved, and regulation enabled through technology,” stakeholders said.

Investors pay capital gains tax on all profitable transactions, but this tax is not adjusted against losses. Officially declaring capital gains tax as the final tax in the budget would provide a strong market incentive.

The Rastriya Saja Party has pledged zero tolerance for market policy irregularities in its manifesto and supports the investors’ demand for declaring capital gains tax as the final tax.

There is no need to include new issues in the budget, but past budget commitments must be implemented, emphasized Dhakal. He said, “Issues such as restructuring the securities market, facilitating investment by non-resident Nepalis, and mobilizing various funds into the market should be put into action.”

Out of four key issues included in previous budgets, none have been implemented to date. However, the current government has five years to implement them. Ranabhat stated, “The government has five years, so it can implement issues that were announced but not enforced previously.”

The Rastriya Saja Party’s manifesto addresses the capital market, and with an economy minister knowledgeable about capital markets leading the party’s government, the budget is expected to be implementation-focused.

The first longstanding unimplemented issue in the budget is: Restructuring the Securities Market. The proposal includes reducing government ownership in NEPSE and increasing shares held by foreign strategic partners, institutions, and the general public. The Rastriya Saja Party also includes this in its manifesto. Dhakal emphasized, “The government must not only include this in the budget but also ensure its implementation.”

This suggestion was also made by the previous economic reform advisory committee. Currently, the government holds 58.66 percent ownership in NEPSE, which hampers many operations. According to a former NEPSE CEO, new technologies and trading tools have not been implemented for so long. If government shares are reduced and distributed to foreign strategic partners and other institutions, the capital market could reach new heights.

“With foreign strategic partners, international technology will enter, trading tools will increase, transparency will improve, and regulation will be technology-driven,” he explained.

For example, the Dhaka Stock Exchange in Bangladesh has Chinese Shenzhen and Shanghai Stock Exchange investment involvement. Shenzhen Stock Exchange’s Deputy Director, Wang Hai, also serves as a director in Dhaka, bringing Shanghai Stock Exchange technology to Dhaka. Such a model could be appropriate for Nepal as well.

Government ownership hinders capital market progress. Attempts to add technical tools face resistance from employees and related parties who prefer maintaining the status quo without work, based on their experiences.

The second persistent unimplemented budget issue is: Facilitating Investment by Non-Resident Nepalis (NRNs). A major challenge lies in NRNs’ ability to repatriate investment and dividends from the secondary market. The government has not yet implemented policies to address this.

Previous high-level economic reform commissions recommended allowing NRN investors to trade on the Nepalese stock market, but unclear policies on dividend repatriation reduce the incentive for NRNs to invest.

“NRNs can repatriate only 50 percent of their investment amount twice a year, but there is no clear provision on dividend repatriation. Since dividends are the primary motivation, permitting NRNs to trade without clear policies is meaningless,” explained stakeholders.

The third issue, frequently included but not enforced in budgets, is: Mandatory Stock Market Listing for Large Capital Companies. While exact capital thresholds are undefined, this remains mostly a budgetary mention. Some companies register publicly but show little interest in issuing shares.

Unless public companies are mandated to offer shares to the general public, top-performing companies will avoid the market, allowing weak companies to enter and cause losses to investors.

The government must set a capital threshold beyond which companies must issue shares and list them on the stock market. Currently, over 2,000 companies are registered publicly at the Company Registrar’s Office, but only around 300 are listed on the stock exchange.

The fourth issue consistently included but not implemented annually is: Diversification of Securities Instruments. Currently, the stock market trades shares, limited bonds, and mutual fund units. Instruments such as government bonds, derivatives (futures, options), and exchange-traded funds (ETFs) are not yet available.

Before introducing these, the market must be equipped with suitable technology and resources.

The Rastriya Saja Party also covers this in its manifesto, stating, “With clear legal framework and strict regulation, intraday trading, short selling, and derivative financial instruments will be introduced in stages.”

Another related topic is: the operation of commodity markets, which, though distinct from stock markets, would be regulated by the Securities Board and could influence the capital market as an alternative investment avenue. However, political interference allegations regarding licensing have been raised. The government faces the challenge of advancing this fairly.