The capital market is rife with shock and concerns that the introduction of a capital gains tax will hurt the growth ambitions of the Ghana Stock Exchange (GSE), as investors looking to make maximum return on investment are more likely to flee to other markets that provide better incentives.
Capital market players are therefore calling on government to either review or totally reverse the capital gains tax — which is paid when one sells an asset such as stocks or property and makes money from the sale — since it defeats the growth potential of the local bourse, which is the least liquid market in the West African sub-region.
“The imposition of a capital gains tax makes Ghana the only market in the region that has a capital gains tax on listed securities, and will deal a competitive blow to the GSE. We are about to see foreign investors flee Ghana’s equity markets,” said Dr. Sam Mensah, Chairman of the GSE. Abena Amoah, an investment banker of Baobab Advisors also added: “We are competing with other markets in Nigeria and the West African francophone capital markets for investment.
The challenge here also is that 70 percent of our market trading comes from foreign investors. “In any case, the Ghana market is the least attractive of the three major markets in the sub-region, because we are not as liquid as the other markets and we have fewer companies listed in comparison. That means we are driving them away,” she added.
Investment gains made from the Ghana stock market have in the past been exempted from capital gains tax, but implementation of the new Income Tax law since January 1 this year requires capital gains earned by companies be subjected to capital gains tax at a flat rate of 15 percent. Also, the 2015 Income Tax Act has abolished the 3 percent rebate on income taxes for listed companies during the first three years of their listing on the stock exchange.
Furthermore, the new tax regime abolishes the exemptions of mutual funds and unit trusts from taxes, including the tax-exempt status of the Ghana Stock Exchange. The market’s reaction to introduction of capital gains tax has been one of disbelief, since the business operating environment in the country has already eroded the gains of investors.
Dr. Sam Mensah, who is also the technical advisor at the Ministry of Finance which spearheaded introduction of the capital gains tax, further explained at the Ghana Stock Exchange’s 25th anniversary public lecture on the ‘Past, Present and Future of Stock Exchange operations in Ghana’ that the priority now for managers of the economy should be macroeconomic stability and a robust regulatory framework for the stock exchange’s growth. He added:
“The current high interest rate environment has dealt a big blow to the equity market as investible funds have moved out of the stock markets to alternative instruments, such as fixed deposits of Non-Bank Financial Institutions (including microfinance)”.
Ms. Amoah also noted that even without the new taxes, the capital market struggled last year; and with investors looking for the best returns, and a weak currency that whittles away their monies due to depreciation, introduction of the taxes will further whittle down their monies and eventually drive them away.
Deputy Finance Minister Mona Quartey, in response to the demand of industry players stated that government will discuss and review the market players’ comments and see what can be done; insisting, however, that government must still raise revenue to narrow the deficits and reduce borrowing.
Mrs. Quartey added that in terms of policy direction, government wants to create an enabling environment for the stock exchange; but in addressing macro-economic stabilisation, the government has a twin deficit — budget and current account — and it is important the state generates revenue to narrow that gap, which unfortunately will affect other parts of the economy like the stock exchange.
“We have listened, we will discuss and review it and see what we can do about it — but government will always put in place policies to make the stock exchange grow, because that is another source of funding outside borrowing from the banks,” she said.