Capital gains tax may kill stock market: Ravi Abeysuriya

Feb 26, 2016 (LBO) – Sri Lanka’s government should not impose a capital gains tax on the stock market as the market still runs on low trade volumes, Group CEO of Candor Group, Ravi Abeysuriya said.

Capital gains are profits realized on a sale of a non-inventory asset that was purchased at a cost that was lower than the amount realized on the sale.

The most common capital gains are realized from the sale of stocks, bonds, precious metals and property.

Prime Minister Ranil Wickremesinghe recently hinted that the government would move away from a subsidy regime to a capital empowerment regime through taxing capital.

Prime Minister pointed out that he would change the tax system which is currently acquire more tax from the ordinary people and charge less from the capitalists.

Wickremesinghe however did not clarify whether this would specifically apply to the stock market.

Abeysuriya said a possible imposition of tax on capital gains of stocks will also include capital losses where people will start to claim these losses wiping out the stock market risk factor.

“There is empirical evidence in countries where capital gains tax was brought into the stock market,” he said.

“In March 2012 one country brought in capital gains tax and the market trading volumes came down by 36.5 percent.”

“So unlike in the US, you can kill the market by bringing in capital gains tax to markets with low trade volumes.”

Abeysuriya suggested that it is better to keep the share transactions levy (STL) rather than imposing a capital gains tax for stock markets.

STL is purely based on the transactions taking place in the stock exchange, revenue generated under this fluctuates in accordance with the volume of the share market dealings.

Sri Lanka however removed this levy for all transactions on equity from 01 January 2016 in line with a budget proposal aimed at encouraging share market trading.