Why Capital Gain Tax on Equities could be a good idea.

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Recently, there has been a lot of rumors on CGT being implemented on Stocks. Needless to say we heard a lot of protest and reasonable sounding arguments against this tax.

Having said that, i think people here are complaining because, everyone here is in the markets. And this is your profit being affected. Not so much because you think it’s worse for the country etc.

Having said that, most forumers here should actually be happy, because most of retailers lose in the market. You can now set it off against you income tax.

Here are a few reasons why i think its an Ok-ish idea, depending on how its implemented.

 

  1. Earnings should be taxed equally across the board as much as possible.

Why should Koon Yew Yin, who made a few hundred million from stock market pay zero in tax, while the middle class individual who earns RM50k – RM70K a year taxed at 16%?

This does not make sense. It’s almost as if the middle class of malaysia is subsidising the rich of malaysia.

One gets CGT on property gains. It does not make sense for gains from stock investment to not be taxed as well.

I would suggest a similar structure to the current property tax

Disposal Within 1 year: 20% tax

Disposal on 2nd year: 15% tax

Disposal on 3rd year: 10% tax

Disposal on of after 4th year: 5% tax

 

  1. Encourage investing instead of gambling

One of the reasons why US markets is more vibrant to an extent, is because one CGT is taxed, and they are different rates depending on how long it is held.

This encourages investing and holding for a longer period of time.

If one were to even take a look on the kind of research being churned out in the US, the quality is far beyond anything here. This is the same for most mature markets.

Having said that, this is probably bad for me, because as an investor, it’s my preference to have others be gambling instead, and lower my long term purchase cost of my shares.

 

Now, there are a few reasons that others as put up, on how CGT on gains from stocks will be detrimental to malaysia and its markets. Allow me to debunk them, or illustrates the trade offs.

Or how it can be implemented better.

  1. Malaysia has weak capital flow to begin with, if we create tax, it would kill it.

This is true. But malaysia had weak capital flow to begin with, and has deterioated from 20% of the MSCI Asia Index to less than 3%.

The goal is to solve this problem first.

One of the reasons malaysia has weak capital flow, is due to the fact that many foreigners do not trust the currency, the government or the people that much to begin with.

US  and Europe have CGT and yet have strong capital inflow. China has no CGT, and yet stocks have incredibly low valuations. This reflects the confidence of investors in the market.

To make malaysian markets more attractive to investors the government should,

  • Open up the markets completely, and remove any capital inflow or outflow restrictions.
  • The government needs to show that they can be trusted and follows the rule of law.
  • The Securities Commission also needs to really crack down on rubbish companies, insider trading etc. NETX, MLABS etc is all under a stock market manipulator.
  • To create incentives that focus on investing instead of gambling
  • Open up the exchanges completely, with direct links to every market in the world, and have international brokerages come in. Let our local brokages fight it out or die, very simple.
  • Enable bonds to be sold easily over the exchange.
  • Allow stocks to be sold in foreign currencies.
  • Stop using PNB, Khazanah, LTAT, KWSP etc as buyer of all resort. These people need to sell stocks whenever valuations are unattractive. These funds already have some ponzi like characteristics in them to begin with.

Some of those reasons above are the same reason why China companies have low valuations.

 

  1. Companies will find it harder to raise money.

Regardless of market, rubbish companies will find it hard to raise money, while great companies will find it easy to raise money.

People when they find it hard to raise money here, is due to a reason completely different from whether or not we have CGT.

 

  1. Flight of foreign capital and local companies falling into foreigners’ hands.

One of the points raised by Jay,

“In an uncompetitive capital market, aspiring local companies would also probably choose to list themselves overseas rather than in Bursa, which means highly likely that these future local champions would end up being owned by foreign investors rather than locals. It’s just sad to think about that.”

Does not really hold water for me. What do you mean by un-competitive capital market?

Do you mean market that is unwilling to give stupid valuations to companies?

Does this mean you would rather Malaysians be the one paying stupid valuations? Like Tunepro and AAX when it was listed?

Would you rather the loss be in malaysian hands? Right now, despite how it may increase my future cost, i would rather SAPRNG had listed in NYSE.

At the end of the day, for most local companies, listing in Malaysia is way way cheaper than trying to list in SGX, HSI, NYSE, NASDAQ, Shanghai or Shenzen. Especially when it comes to maintaining the listing.

And if the Company is really out to raise money, instead of scamming money, they would take the more reasonable route of saving their cost by listing in KLSE instead of overseas market.

 

Conclusion

Having said that, they are probably better things to tax for now, Sugar for example. Its also not a bad idea to let immigrants come in as well, to run our mamak’s etc.

All these places which need high foreign labour is closing down. Loosen those restrictions and let these places come alive again and pay income tax.

But this does not mean that CGT should not be levered on Stocks. It should be, but the timing is probably best after we have solved most of the problems that result in malaysian exchanges being unattractive to begin with.

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