NBR seeks to raise taxes on dividend income

The finance minister said in his budget speech that the government wants to make the capital market vibrant. But a number of proposed tax changes could push institutional and retail investors away from shares and into safer investments such as government securities.

Under the proposed budget for fiscal year 2026-27, corporate investors would lose the preferential 20 percent tax rate on dividend income from shares and instead pay tax at their regular corporate rates.

For banks, that could mean paying 37.5 percent tax on dividend income instead of 20 percent.

The second proposed change affects individual investors. Retail investors currently receive a 15 percent tax rebate on stock market investments, but the budget proposes reducing that to 10 percent.

The maximum investment eligible for the rebate would also be lowered to Tk 7.5 lakh from the current Tk 10 lakh.

Moreover, income or discounts earned from zero-coupon bonds, a type of debt instrument purchased at a discount and redeemed at full value at maturity, are currently exempt from income tax for all investors. The FY27 budget proposes scrapping that exemption.

According to market analysts and asset managers, these proposed tax measures could send the wrong signal to investors at a time when the government is trying to revive the capital market.

“Both of the proposed tax measures for corporates and retail investors are negative for the capital market,” said Ali Imam, managing director and chief executive officer of Edge Asset Management.

However, he said the proposed tax on corporate dividend income would have a greater impact because institutional investors are already limited in the market. The additional tax would further discourage them from investing.

CORPORATE TAX CHANGES ON DIVIDEND INCOME

At present, corporate investors pay a 20 percent tax on dividend income earned from stock market investments. If the provision is abolished, they will instead pay tax according to their respective corporate tax rates.

For example, if Bank A invests in a listed company, Company B, and receives Tk 100 in cash dividends, the bank currently pays Tk 20 in tax on that dividend income, even if its corporate tax rate is 37.5 percent.

If the provision is removed, the bank would have to pay tax at 37.5 percent on the same dividend income.

Banks currently make up the bulk of institutional investors in the stock market and are therefore likely to be the hardest hit by the measure.

Moreover, with treasury bond yields remaining attractive, banks and other institutions may choose risk-free government securities over stock market investments.

Edge Asset Management CEO Ali Imam said dividend income represented a distribution of profits paid from earnings that had already been taxed.

“Therefore, imposing an additional tax on dividend income is illogical in itself, as the underlying profits have already been taxed. Increasing the tax rate further amplifies the negative impact, effectively creating a double burden on investment returns,” he added.

Iftekhar Alam, president of Bangladesh Merchant Bankers Association (BMBA), said investors could shift their funds if returns on other securities are higher.

However, he said the country lacks sufficient investment vehicles.

Alam said there has been positive sentiment in the market since the new commission took office recently and expressed hope that investors would remain in the stock market.

Saiful Islam, president of the DSE Brokers Association (DBA), urged the authorities to retain the tax benefits currently available to stock market investors for at least another couple of years, as the market is undergoing a transformation and rebuilding.

BUDGET OTHERWISE WINS MARKET APPRECIATION

In his budget speech, Finance Minister Amir Khosru Mahmud Chowdhury said the government would work to reduce the private sector’s excessive dependence on bank financing and make the IPO process time-bound and digital.

According to a budget analysis by Sheltech Brokerage Ltd, these steps would strengthen the role of the capital market within the financial system, resulting in greater market depth and improved liquidity.

It says the digital IPO process would reduce approval times, lower compliance costs, increase the attractiveness of listing and potentially expand the IPO pipeline.

The budget also outlines plans to modernise market infrastructure by gradually shifting from the existing T+2 settlement cycle to T+0 settlements. Non-Resident Investors’ Taka Accounts (NITA) accounts would also be simplified.

Sheltech Brokerage said these measures could facilitate foreign investment inflows and improve liquidity, although they might also increase market volatility.

Meanwhile, the Dhaka Stock Exchange (DSE) welcomed the national budget, saying the measures would help develop the country’s capital market and create a more investment-friendly environment.

In a statement issued on budget day, DSE Chairman Mominul Islam expressed gratitude to the government for prioritising the restoration of investor confidence, strengthening market governance and addressing long-standing concerns of market stakeholders, saying these steps reflected a strong commitment to the sustainable development of the capital market.

He said the proposed measures to improve coordination among regulatory agencies and institutions linked to the capital market would enhance efficiency, transparency and accountability, helping build a stronger and more integrated market infrastructure.