The development of a strong and viable capital market is a complex process and requires a systematic approach consisting of activities designed to grow, strengthen and improve the market.
Proper regulatory and supervisory framework provides a balance between market freedom and investors’ protection in a stable environment.
However, the effect of an inappropriately-designed tax framework tends to impede the development of the nation’s capital market. Indeed, arriving at an investment-friendly tax regime in Nigeria will spur activities in the local bourse, and ultimately bring back Initial Public Offerings (IPOs).
Experts have highlighted the need for a reduction/elimination of some taxes on capital market activities, especially the Value Added Tax (VAT), and stamp duty on transactions.
The Federal Government’s tax policies are of particular interest to the Nigerian Stock Exchange (NSE), and its members regarding the growth and development of the capital market.
The Vice Chairman, Highcap Securities Limited, David Adonri, noted that unlike progressive economies that do not impose a tax on investment, Nigeria taxes various ventures.
He decried the per cent withholding tax on dividends, after taxing the corporate income from which the dividend was paid, describing it as double taxation.
He argued that because the longer the tenor of investment in the capital market, the higher the risk, there is need for incentives to encourage long-term investment.
According to him, tax incentives are major sweeteners that make the capital market attractive, saying: “Generally, progressive economies do not tax investment. They only tax consumption and transfer part of their tax revenue to subsidising investment.
“Contrary to this global best practice, Nigeria imposes various taxes on investment include 10 per cent withholding tax on dividends, after taxing the corporate income from which the dividend was paid. This is double taxation.
“There is stamp duty on stocks purchased and sold in the capital market. This is a tax. Additionally, there is withholding tax on commission earned by market operators, together with payment of corporate tax on their profit. This is double taxation.
“The multiplicity of these taxes is a disincentive to investment. They need to be rationalised,” he advised. Also, the Publicity Secretary, Independence Shareholders Association, Moses Igbrude, said investments should not be treated as consumer goods purchases, but as a means of promoting a long term savings culture that could be channelled towards economic growth and development.
Consequently, he said taxes like VAT and stamp duty should be removed from all capital market transactions to encourage and attract more investors into the market.
“After the 30 per cent company income tax, the shareholders are also levied per cent withholding tax on their dividends, which is tantamount to double taxation.
“A situation where the government collects from the company and also taxes the investors on the little that is coming from the company is discouraging; it is a disincentive to investment
“To attract more investment into the market and encourage listed firms’ growth, the government must remove these multiple taxation impeding the growth of the market and enable the market to play its pivotal role of capital formation and economic development in Nigeria.”
The Chief Research Officer, Investdata Consulting, Ambrose Omordion, said the reduction of some taxes on capital market activities and the abolition of others would enhance investment in Nigeria.
This is because lower tax rates, for instance, would lead to more savings, higher employment, and a boost in the Gross Domestic Product (GDP), resulting ultimately in the expansion of the national tax base.
He argued that the amendment limiting minimum tax computation to 0.5 per cent of turnover, and companies with turnover below N25 million to be exempted from minimum tax payment of 20 per cent, now applies to small businesses with a turnover of between N25 million and N100 million may not benefit listed companies. This is because many currently report revenues far above the N100 million levels.
He also said the increase in VAT might reduce consumers’ disposable income, which might slightly affect their ability to invest in the capital market, further reducing its activities.
The Nigerian capital market is inundated with tax requirements that discourage investments and threaten the achievement of national economic objectives through the capital market.
Following its reintroduction, dealing members are required to pay VAT on their brokerage commission. Stakeholders had, in 2019, condemned a Federal Government’s directive to return VAT on all stock market transactions, saying the action was a disincentive to investment.
The NSE dealing member firms were directed to charge VAT on all commissions applicable to market transactions effective July 25, 2019, which had earlier been abolished in 2014 by the then Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, as published in the Government’s Official Gazette No. 95, Vol. 101 issued on July 30, 2014.
Against this backdrop, stakeholders have urged the Federal Government to, as a matter of urgency, abolish the withholding tax, VAT, and contract stamp from the market to enable it to contribute meaningfully to capital formation.