In practice, many argue, government regulation of the financial sector contributes to, rather than mitigates episodes of financial instability.
That’s because politics and political pressure often interfere with the design and implementation of specific regulations, leading to unintended results.
A strong connection exists between financial industry lobbying and favourable financial legislation and a cohesive effort by the industry as a whole is the need of the hour to combat arbitrary and senseless regulation.
At least this is what many in the industry believe.
The importance of establishing an industry body that cuts across all financial market players with more recognition and weight when the proposed association lobbies with government was proposed at the Capital Markets Conference, CAPM 2017 organised by UTO Educonsult (PVT) LTD held on Tuesday.
“This is a common phenomenon in other developed markets where a Financial Markets Association represent banks, insurance companies, finance companies, stock brokers, fund managers and all other market intermediaries,” Dilshan Wirasekara, CEO First Capital Holdings PLC who proposed this at the panel discussion on ‘Impact of the Budget on Capital Markets’ told the Business Times on the sidelines of CAPM. Currently there’re different bodies in each of these segments that only look at their specific agendas and don’t effectively lobby for the betterment of the overall market, he said reiterating that the new body should ideally be put forward by the different associations coming together through collaboration and could be even facilitated through one of the regulators like the Securities And Exchange Commission (SEC) or Central Bank.
“It’s something that I have proposed many times but needs some coordination to get it going.” He added that it should be the voice of the financial industry that is suited to provide trusted and expert information to policymakers, regulators, etc about the financial industry.
P. Asokan, Consultant SEC added that this is a good idea where all associations representing the capital market including primary dealers can come under one umbrella to represent the wider interests of the finance industry.
Vindya Jayasekera, Vice President NDB Wealth Management Ltd, noted that a Finance Industry Association is needed as it’ll be a single united body to speak on behalf of the entire finance industry.
“Currently the industry bodies are fragmented with a Banker’s Association, Forex Association, Money Brokers, Unit Trust, Brokers, etc. All representations are made separately and representations may overlap or worse, oppose each other.” However she also noted that smaller parties’
message may get lost in the crowd as a negative.
“Also with several regulators around combining forces would be difficult,” she said.
She added that bank business is intermediation and fund managers, securities brokers are in the business of disintermediation, hence there’ll be with conflicting objectives.
On the future of Unit Trusts following the removal of tax incentives, Mr. Asokan told the Business Times that this may initially result in an outflow of funds from the industry and exert pressure on the Unit Trust management companies.
“Since the inception of Unit Trusts in Sri Lanka, the Government has been granting some tax concessions to promote the industry. Through the 2012 budget proposals the profits and income from redemption of units were exempted from income tax in the hands of the investors. This assisted the industry to collect funds from corporate investors who could enjoy a tax benefit of 18 per cent when investing in Unit Trust Funds. In the 2017 budget proposals, such benefits to corporate investors have been removed,”
he said at the panel discussion.
On the other hand, he said that this will persuade the Unit Trust management companies to focus on increasing their retail investor base and promote equity funds as these funds will continue to remain tax exempted in the
hands of the investors.
On the impact that debentures taxation has on the future of the debenture market, Mr. Asokan added that through the 2012 budget proposals SEC was successful in getting the interest income from listed debentures exempted from Withholding Tax (WHT). “This resulted in the debenture market growing from Rs. 48 billion as of end 2012 to Rs. 290 billion as of end 2016.
Removal of this tax benefit will definitely increase the cost of debt capital as investors will now demand a higher return on debentures. SEC believes some tax incentive is still needed to grow the debenture market in Sri Lanka as it provides an opportunity for companies to raise long term capital to grow their businesses.”
Mr. Asokan added that the SEC has been making representation to the Ministry of Finance on various matters related to capital markets. “SEC has already made some recommendations with regard to the proposed taxation on Unit
Trusts and Debentures.”
No tax on capital gains
Suresh R.I. Perera, Principal – Tax and Regulatory, KPMG Sri Lanka, noted that a Capital Gains Tax (CGT) will not be applied on the share transactions.” The indications are that the CGT will not be applicable on Colombo Stock Exchange (CSE) as the budget proposal 2017 referred only to the imposition of CGT only on immovable property.”
On the regional perspective, he told the Business Times that Taiwan repealed CGT on stock market transactions with effect from January 1, 2016. “India levies CGT only on short term Capital Gains and exempts long term gain which is subject to securities transaction levy. Indonesia levies CGT only on immovable property and exempts stock exchange transaction. Thailand levies CGT from institutional investors whereas stock exchange transactions of individuals are exempt. Kenya introduced CGT in the 1970s, abolished it in 1985 and reintroduced it in 2014. Countries such as Australia, UK, France, Denmark,
Pakistan, impose CGT on their stock markets,” he said.
At present both capital gains and trading profit on sale of shares on the CSE are exempted from income tax, he added noting that the focus and the fear is that the CGT will be extended to stock exchange transactions. “Actually people who prefer to trade on a day to day basis should be more focused on the retention of the current income tax exemption on the trading profit from
the sale of shares, as opposed to the fear on imposition of CGT.”
CAPM saw a discussion on “The Global Trends in Capital Markets” and a session on ‘State of the Economy’ which saw eminent panellists discuss the outlook for the economy for 2017, the interest rates and if they will continue to rise unabated or is it expected to plateau, the exchange rates, especially in the aftermath of the inauguration of a new President in the US and the sectors driving the economy in 2017 such as renewable energy, real estate and tourism.
Equity Markets was also on focus at this year’s CAPM with sessions on why the stock markets don’t reflect the growth of the country or is it no longer a barometer of the economy, if private equity has replaced IPOs as the popular means of raising equity and what ails the stock market and what could be done to revive its fortunes.
National Tax Council underway
The Budget Proposal 2017 included a commendable proposal to establish a National Tax Council (NTC) in Sri Lanka. The frequent complaint against the Sri Lankan tax system is the inconsistency of the policy makers, Suresh R.I.
Perera, Principal – Tax and Regulatory, KPMG Sri Lanka noted at the CAPM.
“Tax is a highly specialised field, various direct, indirect and import levies are interlinked and interwoven with all commercial transactions and have impact on various stakeholders which are not apparent to policy makers at the first glance unless they possess the requisite technical knowledge and experience,” he said noting that setting up a NTC would assist to resolve the policy inconsistency by entrusting the formulation of a National Tax Policy to a group of skilled and committed personnel, with requisite skill, experience and technical knowledge.
Some of the duties NTC may include is to review and recommend any amendment to existing tax laws and introduction of new taxes, to issue white papers with regard to amendments and introduction of new taxes to the public and obtain feedback from stakeholders prior to implementation and be in charge of drafting of tax laws including ensuring adherence to implementation on due dates, he said.
“It will also entail entertaining and review policy changes requested by stakeholders and lobby groups and also commissioning surveys with regard to impact and proper implementation of tax policies from time to time,” he told the Business Tines.
This will also ensure that notwithstanding the change of Government a robust national tax policy will continue in the long term establishing certainty and tax payer confidence, Mr. Perera opined. “Therefore as a matter of priority before implementation of a new Inland Revenue Act, Customs Act or any other tax act, the national tax council proposed in the budget should be implemented immediately.”