Tax Relief for Individual Securities Investors

The Government of Vietnam recently submitted the National Assembly’s Standing Committee a proposal on reducing and exempting tax for some taxpayers afflicted by economic difficulties in a bid to prop up economic recovery and development. According to this package of solutions, individual securities investors will be exempted from securities transfer tax and dividend tax. The National Assembly Standing Committee agreed to submit the package of solutions proposed by the Government to the National Assembly - the supreme lawmaking body - for discussion and ratification.

 

In fact, the Vietnam’s stock market has declined in a long period of time, with the benchmark VN-Index dropping nearly 20 percent in the year to date. However, the Vietnam Financial Investors Association (VAFI) pointed out that the VN-Index did not correctly reflect the hardship that the stock market experienced as most shares lost 30 - 60 percent of their values since the beginning of the year. A vast majority of investors (over 90 percent or so) are suffering losses but they are still paying taxes. This reality is irrational and contrary to the Law on Personal Income.

 

The tax exemption is aimed to ensure equality for securities investors in relation to depositors who do not have to pay tax for capital gains from bank deposits. Nonetheless, the exemption is not applied to banks and financial companies as they are paid big dividends. The amount of giveaway tax on securities investments and dividends is not much, estimated at over VND1,000 billion.

 

However, the proposal is objected by some experts. If investors incur losses, they should be imposed on lower tax rates, not free tax. Securities investors should not be likened to depositors because the latter are major wage earners and pensioners who have a little amount of money to put at banks while the former is mainly the rich. Therefore, tax exemption should not be applied to the rich.

 

According to the VAFI, the Finance Ministry's proposal on temporary suspension of collecting tax on securities transfer and dividend is completely correct. This is one of essential solutions to stabilise the stock market in a bid to promoting its inherently important roles.

 

According to experience in Thailand, the Bank of Thailand (BOT) - the central bank - is currently applying the base rate of 3.25 percent per annum, nearly five times lower than that in Vietnam. Meanwhile, the size of the Thai stock market and daily trading value are dozens of times greater than those in Vietnam. The market capitalisation of its blue-chip stocks (good performing large-sized companies) is 2 - 4 times larger than that in Vietnam. Tax on capital gains (deposits) is now at 10 percent per annum and tax rate on dividend is 10 percent. Nevertheless, Thailand does not impose tax on securities transfer which has been abolished since the Asian financial crisis in 1997.

 

Why are deposit and lending rates in Thailand very low? There are a lot of factors: Thailand is an economy with trade surplus, it has good inflation control policies, and importantly it has a good policy system to direct almost all unemployed capital to banks and the stock market.

 

Besides, gold preference in Thailand is not as strong as in Vietnam and gold is subject to duty. Thailand also charges high property tax and transfer tax and real estate trading is thus prone to high risks. In addition, it does not impose tax on securities transfer of individual investors, aiming to create incentives for people to use their money on the stock market. And in any stock market in the world, cash flows of individual investors are very important as it maintains the market liquidity.

 

So, why are deposit and lending rates in Vietnam always much higher than other countries in the region and the world? Giving reasons for this, the VAFI said Vietnam is an economy with trade deficit; its inflation control policies are impacted and inflation frequently occurs, and the people, regardless of low or high-income earners, extremely prefer gold, US dollars and real estate. Meanwhile, it lacks proper measures to stop and prevent these shortcomings. Additionally, idle cash is flowed into different channels. If almost 100 percent of unemployed cash is deposited at banks and invested in stock markets in other countries in the region, only some 30 percent of idle money is placed at banks in Vietnam. Low money supply in couple with high credit demand is the underlying cause for much higher deposit and lending rates in Vietnam in compared with regional countries.

 

According to experts, to direct most of unemployed money to the banking system and a part to the stock market, Vietnam needs to have many policies. In particular, it needs to restrict gold bar trading. For example, it allows the people to possess gold but bans them from purchasing it. If they want to sell, the State Bank will purchase at the world-based price. It also needs to fight against dollarisation and levy land taxes and regulate land ownership to intimate property trading (Such as policy should be applied step by step when the real estate market is warming up.)

 

Vietnam needs to prop up the development of its stock market, including duty-free securities investments for institutional and individual investors. Once the stock market is stable and developed, companies will find it easier to raise capital, thus easing credit burdens on commercial banking system.

 

The VAFI said securities trading is the riskiest business form, much riskier than depositing the money at the bank. “In any country in the world, those who deposit their money at banks will never lose their money because of insurance policies even though banks are dissolved or go bankrupt. But with securities business, when a company incurs operating losses or goes bankrupt or gets dissolved, investors will receive no dividends, lose their capital, or suffer more loss. On the other hand, the tax rate on bank deposits is usually higher than or equal to that on dividends. When drafting the Law on Personal Income Tax, the tax on savings deposits is crossed off because [Vietnam] wants to encourage people to place their money at banks. In reality, this point of view is perfectly correct. However, the levy on dividend is applied while the amount of capital poured into the stock market is extremely small in relation to total deposits of the population. This is a shortcoming, not to mention the fact that savings rates are now much higher than dividend payout ratios investors get,” said the VAFI. So, according to the VAFI, dividend tax should be now abolished and resumed when economic conditions are good enough.