Capital gains tax to hit investors where it hurts

A Ministry of Finance proposal that may impose a 25 per cent tax on income earned through dividends and stock trading may discourage investment in the capital market and ultimately hamper development efforts.

The 25 per cent tax, which will tentatively take affect in January 2009, is too high and would hurt companies’ ability to raise cash for long term investments, says Dinh The Hien, director of the Institution for Informatics and Business (IIB).
"This capital source is very important for Vietnamese companies’ rapid growth and their competitiveness," says Hien.

It is a unilateral and inappropriate proposal based on the market’s strong growth last year and expectations securities investments are a "super profitable business", says Hien.
The capital market is not expected to sustain the unprecedented growth it went through in 2006 and the early part of 2007. As a matter of fact, an increasing number of securities analysts over the past week have argued the bourse may finally be stabilising, particularly after the lackluster performance on the HCM City bourse.

"I think that at present and in the future, investments into the stock market will only generate 15-20 per cent in profit for retail investors, while at the same time they face considerable risks," says Hien.
Analysts suggest that the draft proposal be postponed for the next five to ten years in order to give the securities market more time to develop.

There is also concern for brokerages that the tax will shift investor preferences away from stocks to real estate, gold and bank deposits where returns still seem promising.
Entrepreneurs will potentially get hit twice if the proposal is approved.

"In fact, [the majority] shareholders are also owners who already oppose the 28 per cent tax on corporate earnings," says Hien. "So, is it reasonable if they have to suffer a double tax?"
Deputy Minister of Finance Truong Chi Trung argues companies and executives were not double taxed, and in fact officials were planning to reduce the corporate earnings levy from 28 to 25 per cent to encourage more foreign investment.

General Secretary of the Viet Nam Association of Financial Investors Nguyen Hoang Hai also suggested that policymakers consider decreasing the proposed taxes from 25 to 5-10 per cent.

A lower tax threshold is appropriate given that not everybody makes money on the market. There is little reason to excessively punish investors who are able to turn a profit one year, because securities the next moment could easily take a nose dive, say analysts.

The draft law, though, was only circulated to gauge public opinion, says Trung. The ministry will consider public opinion before completing the draft law and submitting it to the Government for final approval.

Source: VNS