According to points 13.1 and 13.6 on page 28 of the Annual Progress Report, the audit of Rs 440.7 billion of 45 corporate institutions this year has raised serious questions about the method and process of revenue collection in the stock market.
In the main report, the issue of revenue leakage related to the stock market has been mentioned in various points and suggestions have been made for improvement.
Lack of Systemic Integration
"Due to the lack of complete integration between the system of Nepal Stock Exchange (NEPSE), CDS and Clearing (CDSC) and the Inland Revenue Department, there are errors in calculating the actual profit. Due to the difference between the actual profits made by the investors and the profits shown by the system, the capital gain tax received by the state has decreased. The 'Economy' and 'Information Technology' section on page 33 of the report also emphasizes this. The Comptroller and Auditor General believes that since NEPSE's TMS and CDSC's Meroshare system are not connected to the 'Integrated Tax System' (ITS) of the Inland Revenue Department, the tax administration does not have exact data on how much profit the taxpayer made. As a result, taxes are levied on the basis of details submitted by the investors. As a result, stock investors are paying less tax by hiding the actual profits.
Manipulation in the calculation of weighted average cost (WACC)
"The facility of self-declaration of the 'weighted average cost' (WACC) has been found to have been misused when the investor declares the cost of the shares. According to the report, there is a tendency to show less profit by showing higher costs and reduce the capital gain tax to be paid for it. Due to the weak monitoring mechanism, revenue has been lost. The main basis of capital gains tax calculation is the cost price of the shares. The 'Public Finance Management' box on page 33 of the progress report states that there is a need for "systemic reforms to curb revenue leakage". Investors have inflated the cost in the name of old shares or right shares when they themselves enter the WACC through Meroshare. For example, if a share bought at Rs 100 is shown as Rs 150 when declaring a cost in Meroshare, the profit appears to be low and there is a significant drop in the 7.5% or 5% tax that the state receives. The Auditor General Office has taken this as an attack on revenue in the name of 'self-declaration'.
Confusion over tax calculation of bonus and right shares
"There is still a lack of clarity on policy regarding the difference between the face value of bonus and right shares and the difference in the market value. In some cases, the tax liability on such shares is avoided by the investors, the audit said. "
There has been a long-standing dispute over what the base price should be considered when calculating the cost of bonus and right shares. The Comptroller and Auditor General has taken this an area of policy level corruption and confusion. The report also said that the tax should be calculated on the basis of the market value of bonus shares as income or there should be a clear definition of cost value. In the absence of a clear law, capital gains tax worth billions of rupees is stuck in the 'grey area'.
Difference between individual and institutional investors and 'insider trading'
"The report also pointed out that some institutions pay less tax by trading shares through personal accounts due to different profit tax rates for individual investors (5% and 7.5%) and institutional investors (10%). The 'Good Governance' section on page 33 of the report mentions that "official conduct should be followed to promote integrity". Since institutional investors have to pay more tax in the stock market, it has been found that the directors or high-ranking people of the institution purchase shares in their personal names with the money of the institution and pay less tax. This has not only reduced revenue, but also increased the market manipulation through insider trading.
Reform of 'Capital Markets' in the Auditor General's Perspective
The 'Public Accountability in Terms of Audit' box on page 33 of the progress report contains five important recommendations for capital market and revenue reforms:
- Policy Assurance: Uniformity should be brought in the calculation of capital gains to make the stock market transparent.
- Systemic reforms: Automated tax calculation should be started by integrating the systems of NEPSE, CDSC and the Department of Revenue.
- Investor's Interest: Corporate entities should inform the investors about the actual financial position (detailed audit report).
- Regulation of Digital Transactions: Cyber audit and IT audit should be intensified to ensure revenue and security of non-physical transactions in the stock market.
- Promptness in monitoring: The Securities Board of Nepal (SEBON) should regularly monitor abnormal market fluctuations and tax evasion.
