(AFP Photo)
By Mohammed Ayyad
The stock market lost nearly EGP 40bn in market capitalisation through the end of Sunday trading following the announcement of the government’s plan to impose a 10% tax on stock market capital gains and dividends.
The losses pressured the government to offer concessions, which ultimately came in the form of making bonus shares exempt from the tax and raising the exemption limit on monetary dividends from EGP 10,000 to EGP 15,000.
“The government raised the exemption limit on monetary dividends to EGP 15,000. This reduces inequality between different savings vehicles – between those on the stock market and those in banks,” said Mohamed Farid, Chairman of Dcode Economic and Financial Consulting.
Farid, who previously served as deputy chairman of the stock exchange, said: “The government’s exemption of bonus shares from the tax will be a catalyst for companies not currently registered on the exchange to enter the stock market because of the ease of liquidation [sale] of bonus shares, allowing for increased volume of trade on the stock market. Farid believes that, taken together, these exemptions will not significantly reduce the value of proceeds the government is targeting to support social programmes in its budget.
“The government must be serious in reforming the economy through reviewing legislation and improving the environment for doing business by providing lands, utilities, and energy. Otherwise, the tax is going to have a negative effect on the investment climate,” said Farid. “The tax is not a deciding factor for investors. They are looking at the environment for doing business in and its suitability for achieving profits.”
The stock market has suffered from lower trading volumes since the 25 January Revolution, but with changes to the exchange’s listing rules and an increased number of investment instruments, the value and volume of trading has gradually increased. The exchange’s daily average has been approximately EGP 1bn over the past few months.
“The draft law ensures the complete exemption of bonus shares from the tax, rather than forcing investors to retain them for two years, as was approved previously. The new bill also raises the minimum on monetary dividends exempted to EGP 15,000 for all natural persons residing in Egypt, so that the market doesn’t lose its competitiveness,” said Mohamed Omran, chairman of the Stock Exchange, during a press conference at the cabinet.
The stock market tax comes as part of the first batch of income tax reforms being carried out by the government, and is part of the next year’s budget, which, according to the Ministry of Finance, is estimated to bring in EGP 10bn.
“Over the long-term, market indicators suggest that repercussions from the new tax on capital gains and dividends can be absorbed by the stock market, especially given the signs of improvement in the political scene after the completion of the second step in the political roadmap,” said Sherif Samy, chairman of the Financial Supervisory Authority (FSA).
According to the recent amendments introduced by the government on the stock market tax, “an Egyptian citizen or foreigner” residing in Egypt will benefit from the exemption limit in monetary dividends, but those residing outside of the country will not.
The Egyptian stock market saw its first major initial public offering since November 2010 just days earlier with Arabian Cement Company.
The Federation of Egyptian Chambers of Commerce submitted a memorandum to President Adly Mansour calling on him to postpone signing the stock market bill. “We ask the president to not take sudden actions that have a negative effect on the investment climate and to maintain the prestige of the state,” said Ahmed al-Wakil, president of the federation.
