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Reimposition of capital gains tax affecting equities market – BoG

The reimposition of capital gains tax on securities listed on the equities market is dampening investor sentiment – a key cause for the poor start of the market this year, Governor of the Bank of Ghana, Dr. Ernest Addison, has revealed.

In the 2021 budget, Minister for Finance Ken Ofori-Atta said government was permanently retaining tax-exempt status for capital gains on listed securities after its expiration in 2021, in order to make the local capital market more attractive to investors – and by extension make Ghana a preferred investment destination.

However, after expiration in 2021 government failed to present it back to Parliament in the 2022 budget for the tax-exempt status to be permanent. Hence, the capital gains tax has automatically come into effect once more; thereby discouraging investment into equities.

As of March 22, 2022, the Ghana Stock Exchange Composite Index (GSE-CI) had recorded a loss of 1.79 percent. Compared to same period of 2021, the GSE-CI had returns of 14.06 percent.

“The year-to-date loss has been driven by a variety of factors – including the re-imposition of capital gains tax on securities listed on the GSE, which is inducing some investors to switch to government securities,” the Governor said at the end of the Monetary Policy Committee (MPC) meeting with the media last week.

The BoG Governor further stated that “selling pressures, the poor performance of some companies, relatively higher yields on fixed income securities, uncertainty induced by inflation and exchange rate pressures, as well as portfolio reversals,” are among factors responsible for the poor performance.

Interviews by the B&FT with some market participants showed sharp variations in their knowledge regarding re-imposition of the tax and consequent effects on the market’s performance. This is due to scarcely any direct reference to the reversal in the 2022 budget.

“I heard something like that after the last budget was read, but I am not too sure if indeed it has come into effect and how much that has affected investor sentiments this year,” said an analyst who pleaded anonymity on account of the subject’s sensitive nature.

“I understand it was inadvertently omitted, because government wanted to make the exemption permanent; but then, it was not added to the tax amendment bill that was subsequently sent to Parliament,” another analyst who also pleaded anonymity mentioned in an interview with B&FT.

An official of the Ghana Stock Exchange (GSE) however stated that talks, which were described as ‘positive’, are ongoing with the Ministry of Finance to reinstate the exemption when the next full-year budget is presented.

Tax Exemption Regime

The tax exemption regime formed part of government’s continuous efforts to develop and deepen Ghana’s capital market. According to the finance minister, the reinstatement of tax exemptions for capital gains on listed companies in 2016 encouraged investors, particularly local and retail ones, to actively participate in the market.

“In view of this positive development, government has decided to make this tax-exempt initiative permanent. This became critical because it has attracted investment flows into the capital market and has made the market become competitive, especially in the African region where capital gains tax exemption is in place in many markets, including Nigeria,” Ofori Atta said in the 2021 budget.

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