This news highlights the ongoing issue faced by share market investors in Nepal, who are required to pay capital gains tax even when their overall annual investments result in a net loss.
The most basic principle of taxation is that tax is only levied on profit. However, in Nepal’s share market, investors are currently paying tax to the state even when they are actually at a loss.
Let’s consider an example to understand this better. Imagine an investor conducts a lot of transactions in the share market throughout a year. Over the course of the year, this investor makes a profit of 5 lakh rupees. Paying 10 percent capital gains tax on this profit means the investor pays 50,000 rupees to the government.
But during that same period, the investor lost 15 lakh rupees from other transactions. Now, let’s do the math:
* Total earned: 5 lakh rupees
* Total lost: 15 lakh rupees
* Actual net loss: 10 lakh rupees
This means that over the entire year, after all share market transactions, this investor actually lost 10 lakh rupee. Yet, they still paid 50,000 rupees in tax.
It seems like the current tax system is telling investors, “As soon as you earn, 10 percent is mine; if you incur a loss, tough luck!”
Soon after being appointed Finance Minister, Dr. Swarnim Wagle often used to say, “We will increase the scope of tax, not the rates.” However, contrary to this statement, he increased the capital gains tax rates through the budget for the fiscal year 2083/84. The tax rate on gains from investments held for less than one year was increased from 7.5 percent to 10 percent, and for investments held for more than one year, it rose from 5 percent to 7.5 percent.
Defending this move, he told that some share investors had approached him, saying they would even accept capital gains tax at 12 or 15 percent, but it must be clearly stated as a final tax, as the current situation felt like a “sword hanging over their heads.” He claimed that, considering their demand, he had very benevolently set the tax at only 10 percent and declared it a final tax.
In practice, the capital gains tax was already final; Dr. Wagle merely put it in writing, which brought a certain level of clarity. This can certainly be considered a positive step. However, the question now arises: is this truly enough?
If the Finance Minister were to introduce a system where 10 percent tax is applied only on the total net profit an investor makes over an entire fiscal year, after adjusting all gains and losses, then that would reflect true goodwill. This is because, in the current situation, when the market is declining, investors struggle to make a small profit on just one or two transactions. They have to pay tax on these small gains. But if they suffer large losses from other transactions in the same year, they are not allowed to adjust these losses against their profits.
Let’s revisit the previous example. An investor made 5 lakh rupees in profit in one year and paid 50,000 rupees in tax. But in that same year, they incurred a 15 lakh rupee loss. In the final calculation, the investor is at a 10 lakh rupee loss. Yet, despite being in a loss, they are still paying 50,000 rupees in tax.
Therefore, the discussion about capital gains tax should no longer be limited to “What should be the tax rate?” The question “On what amount should the tax be levied?” is far more important. If a system were to be implemented where 10 percent tax is applied only on the remaining net profit after adjusting all profits and losses within a fiscal year, it would be fair for investors, and the state would also be able to collect tax on actual income.
A system that taxes net profit after considering both gains and losses seems much fairer than one that levies tax on profits but does not allow for loss adjustment. Until a few years ago, the scope of Nepal’s capital market was very narrow. But today, transactions worth billions of rupees occur daily. The capital market is expected to expand even further in the future. Therefore, the government should seriously consider not only how to collect revenue from the capital market but also how fair the tax system is. The tax system should be such that tax is levied only on the profit an investor actually earns, ensuring that they do not have to pay tax even when they are at a loss.
AI Disclaimer: This article was originally published on https://bajarkochirfar.com. It has been translated with the help of AI. For the best understanding and accurate facts, we recommend reading the original Nepali version.
