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Extra tax on stock dividend

Hailed by DSE, shocking to some

Ahsan Habib
The budget 2019-20 recommended imposing 15 percent tax on stock dividend to promote cash dividend as part of efforts to increase money flow into the stock market.
The annual plan presented by Finance Minister AHM Mustafa Kamal yesterday also wanted to enforce another 15 percent tax, if any company's retained earn-ings and reserve exceeds 50 percent of its paid-up capital.
The proposals received mix reactions, where some industry experts termed it as the "best stockmarket-friendly budget ever" while others think it will be a bane for some good-performing companies.
The most important thing of the budget is to impose tax on stock dividend to encourage giving of cash dividends by the listed companies, said Rakibur Rahman, a director of the Dhaka Stock Exchange (DSE).
The DSE has over 300 listed companies and there were 93 companies that logged profits last year - with 18 registering more than Tk 50 crore - but declared only stock dividend.
Apart from these; nine companies did not pay any dividend despite making profits.
It is necessary to reduce stock dividend and encourage cash dividend, said Minhaz Mannan Emon, another director of the DSE.
"So, this is the best stockmarket-friendly budget," said Rahman.
Emon echoed the same saying such
initiatives will reduce share supply in the market as stock dividend will be declined and liquidity also will be eased.
The proposed budget also addressed double taxation in dividend income and emphasised on bond market development yesterday. The finance minister said a provision was made in the income tax ordinance last year for resident companies to avoid multilayer taxation on dividend income tax.
This year, Kamal proposed bringing non-resident companies under the purview of the provision.
Anis A Khan, managing director of Mutual Trust Bank (MTB), termed the move to tax stock dividend as a "shocking proposal".
If the proposal gets go-ahead, the MTB would have to pay additional Tk 10 crore tax on dividend for 2018, he said.
No tax benefit for bank and individual taxpayer, so far, has been proposed in the budget, Khan said.
"It is an appreciable effort from the government to encourage cash dividend," said Md Moniruzzaman, managing director of IDLC Investments. "But the thing is stock dividend is declared from net profit after tax or retained earnings. So, taxing it again won't be fair in my view."
Some startups may need to retain cash and companies that are gradually growing requires cash too, he said.
It will be good if the high return on equity generating companies keep cash in their hand, as it will create more opportunities for the general investors to be benefited in future, he said.
"So, the government may find other ways to encourage cash dividends."
Abu Ahmed, a stock market analyst, said the government's initiative is good from one side as it would 'al-most' be bound the listed company to pay cash dividend instead of giving stock dividends.
"But it may be too harsh as sometimes they need to provide stock dividend," he added saying the govern-ment could offer some tax rebate for listed
companies if they pay cash dividends.
/Mimed, also a former chairman of economics department of Dhaka University, said many well-performing listed companies have to keep higher retained earnings for their "bad time".
So, imposing tax on retained earnings thoroughly may not be the solution, he added. Moniruzzaman said a proper explanation is needed on how the retained earnings would be taxed because banks and all top performing companies have huge retained earnings and penalising them for their good performance demands further considerations.
A budgetary proposal was also placed to raise the tax-free dividend income limit to Tk 50,000 which is now Tk 25,000. The finance minister also proposed allowing solvent companies to amalgamate financially sick entities.
Emon said the introduction of the option to amalgamate will reduce the reign of the junk stocks in the market.