ANY decision to impose a capital gains tax on the trading of shares by retail and institutional investors in Bursa Malaysia will be detrimental for the Malaysian equity market.
Such move will inevitably make Malaysia less competitive while triggering further outflow of foreign funds, according to CGS-CIMB Research.
“We gather that Indonesia, Singapore and Thailand currently do not impose capital gains taxes on the trading of shares on their stock exchanges,” observed head of research Ivy Ng Lee Fang.
“There is also the possibility of a capital gains tax being introduced in Malaysia but exemption will be given for the gain from sale of shares listed on the stock exchange as practiced by other countries to stay competitive.”
Deputy Finance Minister II Yamani Hafez Musa told the Parliament yesterday (Sept 22) that Putrajaya is studying the feasibility of implementing a capital gains tax which was proposed by several MPs during the latest parliamentary sitting as part of efforts to replenish government funds spent on combating the COVID-19 pandemic.
“The Finance Ministry (MOF) wants a workable solution which would take into account the long-term effects on borrowers, depositors, investors, financial institutions and the economy,” he added.
To re-cap, the mulling of capital gains tax and one-off higher tax rate on windfall profit has dampened market sentiment on Bursa Malaysia in recent times.
Moreover, CGS-CIMB Research said it remains unclear what potential mechanism the Government will apply to identify companies/sectors that have achieved extraordinary profit to apply the one-off windfall tax potentially.
“This is because some companies could be achieving high earnings growth in 2021F due to a low earnings base,” opined CGS-CIMB Research.
“However, if this one-off tax is implemented, investors are likely to identify gloves, petrochemicals, and commodity sectors as potential sectors that could be affected by the windfall tax.”
In CGS-CIMB’s estimation, every one percentage point increase in the tax rate for FBM KLCI component stocks could shave around 1% off its earnings estimate among the constituent stocks for 2022F and 15 points from its end-2021F FBM KLCI target of 1,629 points.
“These concerns could dampen near-term sentiment on the market till Budget 2022 is announced on Oct 29,” cautioned the research house.
“The KLCI has retreated 72 points (or 4.4%) from its recent peak of 1,601 on 30 Aug to 1,529 points yesterday. We attribute the decline to weaker global markets and concerns over the potential implementation of additional taxes.” – Sept 23, 2021
