Proposed tax reforms may diminish IPO activity in capital market

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Proposed tax reforms may diminish IPO activity in capital market

B Mirror Desk:

The flow of Initial Public Offerings (IPOs) in Bangladesh’s capital market may slow down due to proposed tax reforms in the budget for the 2024-25 fiscal year. The Finance Minister, Abul Hasan Mahmood Ali, unveiled a budget on Thursday that suggests reducing the tax rate disparity between listed and unlisted companies, potentially affecting the incentive for companies to go public.

In the proposed budget, the income tax rate for unlisted companies is recommended to be reduced from 27.50 percent to 25 percent. Meanwhile, listed companies will continue to benefit from a lower tax rate, but the gap is narrowing. Currently, listed companies are taxed at 20 percent if they meet certain conditions and at 22.50 percent if they do not. Under the new proposal, these rates would remain at 22.50 percent for non-compliant companies and at 20 percent for those that comply with the specified conditions.

This adjustment reduces the tax advantage for listed companies from 7.50 percent to 5 percent. Just a few years ago, this tax rate gap was as high as 10 percent, making listing a company more financially appealing. The progressive narrowing of this gap—from 10 percent to 7.50 percent, and now proposed to be 5 percent—has significant implications for the capital market.

Historically, the larger tax differential served as a substantial incentive for companies to list on the stock exchange, which contributed to the overall growth and dynamism of the market. By reducing the tax benefits associated with being a listed company, the new budget proposal could dampen enthusiasm for IPOs. Companies might see less advantage in listing if the tax benefits are perceived as insufficient relative to the costs and obligations of going public.

Market experts and stakeholders had previously advocated for a wider tax gap to encourage more companies to list, thereby enhancing market liquidity and investor participation. They argue that a more significant tax differential is crucial for attracting high-quality companies to the capital market. However, the proposed reduction in the tax rate gap reflects a shift in fiscal policy that may not align with these market expectations.

In conclusion, while the proposed tax reforms aim to create a more balanced tax environment, they may inadvertently discourage companies from pursuing IPOs. This could impact the overall vibrancy of Bangladesh’s capital market by reducing the number of new listings and potentially affecting market growth and investment opportunities.

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