27th May 2025, Kathmandu
The Government of Nepal is preparing to increase the capital gains tax (CGT) on share transactions. This change will take effect in the upcoming fiscal year. The tax hike aims to boost government revenue amid growing fiscal pressure.
Nepal Capital Gains Tax Hike
Currently, investors pay different tax rates based on how long they hold shares. Those holding shares for more than a year pay 5 percent CGT. Investors with shares held less than a year pay 7.5 percent. However, the government plans to set a uniform rate of 10 percent for all investors. This means both short-term and long-term investors will pay the same tax rate on their profits from share trading.
Pressure on Government Revenue Drives Tax Hike
The Ministry of Finance confirms the government needs to increase revenue. Officials say the pressure to meet budget needs leaves fewer options. Instead of introducing new taxes, the government prefers to raise rates on existing taxes like CGT. The budget deficit and rising expenditure push the government toward this decision.
Currently, the government relies on internal borrowing to cover some current expenses. This situation puts more strain on revenue collection. Therefore, increasing capital gains tax appears as a viable way to generate more income. This approach aims to help balance the national budget.
Possible Dual-Rate System Under Discussion
The Inland Revenue Department is still discussing the proposal. Some officials suggest keeping two tax rates instead of a flat 10 percent. Under this system, short-term investors would pay 10 percent, while long-term investors could pay a reduced rate of 7.5 percent. This model would keep some fairness based on investment duration.
Despite this possibility, the government currently leans toward applying one tax rate. Setting the same CGT rate for all investors would simplify tax collection. However, this move could affect investor behavior and the stock market’s attractiveness.
Current Tax Rates And Their Impact
At present, investors who hold shares for more than 12 months pay a 5 percent tax on their capital gains. Those holding shares for less than a year pay a higher tax rate of 7.5 percent. Additionally, shares not listed on the Nepal Stock Exchange attract a 10 percent CGT.
The government also plans to increase the tax rate on unlisted shares. This step aligns with efforts to broaden the tax base and reduce tax evasion. As the stock market grows, taxing unlisted shares fairly becomes essential.
High-Level Committee Suggests Tax Reforms
A high-level committee chaired by Vidyadhar Mallik previously recommended changes in capital gains tax. The committee suggested taxing profits from share trading under the Income Tax Act. According to their recommendation, individual taxpayers earning higher profits could pay up to 39 percent tax.
Moreover, the committee advised setting the CGT at 10 percent for shares held less than a year and 7.5 percent for shares held longer. These proposals aimed to create a fair and consistent tax structure for investors.
Investor Concerns Over Tax Increase
Investors and market participants express concern about the proposed tax hike. They argue that a higher capital gains tax may discourage investment in the stock market. Investors worry that increased taxes will reduce their net returns and affect market liquidity.
Market experts warn that raising CGT could lower trading volumes. This could slow down the stock market’s growth and reduce opportunities for both investors and companies seeking capital.
Some investors urge the government to maintain the current tax rates. They believe stability in tax policies encourages long-term investment. Furthermore, they request that the government clarify that the current rates are final to boost confidence.
Impact On Nepal Stock Exchange
The Nepal Stock Exchange (NEPSE) also faces challenges due to tax policies. The stock exchange has seen volatility in trading volumes and prices. The tax hike may increase uncertainty among investors.
If capital gains tax rises sharply, some investors might exit the market or avoid new investments. This could lead to a decline in market activity. On the other hand, higher tax revenue could support government spending on economic development.
Government’s Balancing Act
The government must balance revenue needs with investor confidence. Increasing tax rates can help fill the budget gap. However, it may also slow down market growth and discourage investment.
Government officials say they will consult with stakeholders before finalizing the tax rates. They plan to assess the impact on the stock market and the overall economy. The final decision will come during the budget announcement for the next fiscal year.
Conclusion: Tax Hike Aimed At Fiscal Stability
In summary, the government plans to raise the capital gains tax on share transactions to 10 percent. This change aims to increase tax revenue amid fiscal challenges. The government also considers keeping different rates for short-term and long-term investors.
Investors have expressed concerns about the impact of higher taxes on their returns. They urge stability and predictability in tax policy to support market growth.
The government will weigh these factors carefully. The coming budget will reveal the final tax structure. Meanwhile, market participants await clarity on how the changes will affect Nepal’s stock market.
For more: Nepal Capital Gains Tax Hike