By Peter EGWUATU & Michael EBOH
Stakeholders and operators in the capital market have thrown their weight behind the move by the Federal Government to give additional tax incentives that would spur growth and development of the Nigerian capital market. Already, the Federal Government has approved extension of tax waivers on sub-national and corporate bonds.
The outgoing Minister of Finance, Mansur Muhtar, who disclosed this recently in Abuja stated that the government is seeking ways to give additional tax incentives that would encourage investment in the market and economy in general.
According to him , â€œ The Federal Government is addressing some of the issues militating against the development of a vibrant sub-national and corporate bond market. As part of the effort to fast track the process, the Acting President and Commander-in-Chief has approved the extension of tax waivers on sub-national and corporate bonds, already approved under the Companies Income Tax Act (CITA) to include the Personal INCOME Tax Act (PITA), Value Added Tax (VAT), Capital Gains Tax (CGT) and short term Federal Government of Nigeria securities as well as a request for a reduction in Stamp Duties for Re-issues of debentures.â€
The obvious intention, according to the Minister is to reduce transaction costs in the bond market, which would have positive multiplier effect on the overall economy.
Meanwhile, stakeholders who spoke with Vanguard on the move by the Federal Government to grant more tax incentives stated that it is a step in the right direction.
Mr. Adebayo Adeleke, General Secretary, Independent Shareholders Association of Nigeria (ISAN) said, â€œ We commend the move by the government to grant more tax incentive to the market. We have been complaining of multiple taxation in the capital market and we would like the government to reduce withholding tax on dividend payment from 10 per cent to 5 per cent.
It used to be 5 per cent until late head of states, Sanni Abacha increased it to the present 10 per cent which is not palatable to investors. Already the company that declares dividend must have paid 30 per cent from the profit declared. Remember that dividend is what investors are paid from their investment. If government continue to take 10 per cent from dividend declared this will not attract investors to invest in the capital market. Meanwhile, we never saw any gazette from the government increasing the withholding tax on dividend to 10 per cent.â€
Continuing, he said, â€œ There is need to reduce tax on profit declared by companies quoted in the, market as a way of attracting companies to be listed on the Nigerian Stock Exchange (NSE). Beside income tax paid by these companies there are other taxes they pay such as education tax, and so on. If there is any tax incentive coming on board it will help to boost production and consequently transcend to higher profit that could be plough back for further investment. Reduction in tax will even enhance governmentâ€™s revenue in the sense that there will be efficient tax administration and a reduction in the number of tax evaders.
Government may not encourage long term investment with heavy taxation on the people as most of the investors will run away from the capital market to money market that are short term in nature. If investors go to the money market they are round tripping cash and there is no meaningful development from such exercise. There is also the need to harmonize the tax policies so that both buyers and sellers of securities would be encouraged to participate in the market.
In his own contribution, Chief Aderemi Oyepeju, Chairman, Ibadan Zonal Shareholders Association of Nigeria said, â€œ It is aÂ welcome development if government is sincere to grant further tax incentives to operators in the market. In addition, we would like government to consider the manufacturing sector because the operating environment has not been conducive for them and they employ the highest number of labour in the country.
â€œIn terms of tax we pay on dividend declared, we want a removal of the 10 per cent withholding tax because it is double taxation. The company that declares the dividend had already paid tax from the profit so why taxing the investors again. If government can remove this kind of taxation it would go a long way in attracting more investment in the capital market.
Also tax incentives will empower the people to spend more and this will have trickle down effect on the economy.
There is also the need to reduce transaction cost in the capital market to attract more listing in the market.
There are many local industries that are interested to access the market but for the huge transaction cost they shy away. The reduction in the transaction cost on bond will also attract secondary trading in the market. If the bond is traded at lower cost investors will go for them and sell them whenever they need.
In his remark on the expected tax incentives for the capital market, Mr.Taiwo Oderinde, Chairman, Proactive Shareholders Association of NigeriaÂ said, â€œ It is a welcome development that has been over due. The granting of tax incentives in the market will also help to enhance confidence. It will encourage stakeholders as well.Â We expect government to grant tax holidays to local companies who want to access the market for funds.
The capital market operators who beers the mind on the tax incentives equally said is a welcome development that will serve as catalyst for economic growth.
Specifically, Mr. Chinenyem Anyanwu, Managing Director, Dependable Securities Limited, said, â€œ The ultimate beneficiary are the investors, and we expect the reduction to drive and increase volume, because if the investors are making good money from the market, it will increase the turnover and this will come back to the stakeholders in the market, in terms of more money to be made. This is certainly a welcome development.
Mr. David Adonri, Managing Director, Lambeth Trust and Investment Limited, said, â€œ
Before now, we have multiple taxation involving investments in the capital market, and whenever there is multiple taxation, it act as a disincentive to investment in the economy. That is why the pronouncement by the Federal Government to reduce some of these taxes is received very warmly, as a welcome development in the market by operators and investors.
This is specifically for the bond market, for which the charges have been adjudged to be the probably the highest in world. All efforts geared at reducing the costs of investing that sector is a welcome development that should enhance activities in that sector.
â€œIf the intention materialises, it will lead to the speedy reactivation of the bond market, a development that we have all been clamouring for.â€
Seye Adetunmbi Managing Director Value Investing Nigeria Limited, said, â€œ Reducing transaction cost in capital market through government intervention is commendable. However, what will drive big volume deals and more activities in the bond sector goes beyond reduction of dealing costs. Letâ€™s look at it from the supply and demand perspective.
From the demand angle, yield on investment is fundamental to investment decision in the financial market where there are competing financial market instruments. Inflationary trend is a major determinant too! For instance if the inflation rate is a single digit and the bond yield is a double digit rate, it is an incentive for investment in the bond market. Also, there must be a systemic inflow of investible funds for medium term investment in corporate debentures and government bonds.
â€œOn the supply side, there must be enough business activities with the potentials of profitability to back_up the issuance of publicly quoted debentures by qualified companies.
If the money market rate is not cheaper than the cost of raising money through issuance of bonds, then decision favours the bond market window. Likewise, policy thrust of government that favours funding of structured capital expenditure or government projects through the capital market is complimentary to driving volumes in the bond market.â€
It should be noted that since the equity segment of the capital market has been unattractive following the global economic and financial crisis , attention has been shifted to corporate,Â sub-national and national bonds as a viable alternative source of providing long term finance to fund growth and development.
However, in 2009 significant progress was made as sub-nationals and corporate entities issued debt securities in the bond market. The states that raised long term fund through bonds in 2009 include: Imo Kwara and Niger while on the corporate side was Guaranty Trust Bank (GTBANK) Plc.
The Finance Minister, also disclosed that government is committed to improving fiscal transparency and responsibility in order to institute a culture of probity and accountability and also improve the governmentâ€™s revenue situation.
â€œ In this regard, reforms and increased revenue generation efforts are ongoing at both the Federal Inland Revenue Service (FIRS) and Nigeria Customs Service, some of the key revenue collection agencies.â€