The government presented a compromise on the controversial capital gains tax on securities transactions on Wednesday, yielding to demands to revise the tax amid the prolonged depression in the stock market.
This is the second setback for the Chinese Nationalist Party (KMT) in its efforts to levy a capital gains tax in its broader tax reform, which aims for tax justice and fairness. The first try flopped more than two decades ago.
However, the proposed revision represents a landslide victory for equity investors as most people will escape the levy, or see their tax rates slashed and thereby a decline in investment cost.
The tax revision proposal comes about two weeks before the first anniversary of the tax on June 1.
Based on the proposal, retail investors will be exempt from the capital gains tax and large investors can opt for a tax rate on transactions that surpasses NT$1 billion (US$ 33.3 million) of just 0.1 percent, rather than pay a 15 percent levy on the actual gains from stock investments in the previous calendar year after the second-stage tax rule goes into effect in 2015.
In other words, investors will pay a just NT$10,000 in “stock transaction” tax, not “stock gain” tax, if they traded NT$1.01 billion worth of stocks in the previous calendar year as the revision stipulates.
The most important part of the proposed revision is the removal of the 8,500-point tax threshold.
Investors have said that the designation has prevented the TAIEX from moving up and hampered turnover from growing as investors will start to sell before reaching the psychological mark.
Investors gave a thumbs-up to the government’s generosity as a proposed cut in tax rates will reduce investment costs, which was reflected in swollen trading volume of more than NT$120 billion on the next trading day after the proposed revision was unveiled.
The TAIEX also extended its upswing to hit an 21-month high at 8,390.
The government’s move to adjust taxation, which was imposed at a bad time last year, is laudable. The government has made taxation simpler and more efficient for investors to adopt and to pay as the tax rate will be lowered sharply.
It is good that the tax rule will not be a factor, or a non-market force, that affects the stock market’s movements in the future, meaning that the market will become more developed and liberalized.
However, the proposal and the tax reform have come at the expense of justice and fairness and go against the Ministry of Finance’s original attempt to solve long-term tax injustices.
The proposal does not result in tax fairness, nor tax justice, by any standards, as major investors are allowed to pay the same low tax rate no matter how many shares they have traded above the NT$1 billion mark.
Moreover, the planned 0.1 percent tax rate will account for almost nothing.
Clearly, the capital gains tax has lost its effectiveness as the government has surrendered to public pressure by focusing its adjustment on only slashing tax rates.
Legislators should put more thought into the review of the proposal today and consider tax justice and tax fairness when making laws.