Investment brokers on the trading floor of the Nairobi Securities Exchange. PHOTO | FILE
What you need to know:
A new study recommends cutting of exchange taxes to deepen the stock market, mobilise investable funds and boost economic activity.
The CGT is believed to have already contributed to the recent fall in the Nairobi Securities Exchange 20-share index to below 5,000 points, discouraging savings.
The research terms the withholding tax on bond income as double taxation.
The listing of more firms and securities could significantly boost gross domestic product (GDP), a new study that recommends cutting of exchange taxes has shown.
Using data from the past 20 years, it recommends that instead of increasing taxes like withholding tax and the new capital gains tax (CGT), the government should reduce the taxes to deepen the stock market, mobilise investable funds and boost economic activity.
“The stock market turnover ratio and bond market turnover ratio … are good predictors of the GDP of Kenya,” the study noted.
The CGT is believed to have already contributed to the recent fall in the Nairobi Securities Exchange 20-share index to below 5,000 points, discouraging savings.
The research terms the withholding tax on bond income as double taxation.
The bonds are mainly held by institutional investors such as fund managers and banks, who also have to pay income tax as well as other levies.
Withholding tax is set at 15 per cent for bonds with a tenor of below 10 years and 10 per cent for the securities with a tenor of 10 years and above.
“The government should provide tax incentives to investors in order to facilitate more investors to pool their savings in form of capital market instruments. For example, by reducing the tax charged on bond interest income, (being a) double taxation relief,” noted the study.
The study conducted by three scholars from the University of Nairobi, recommends the government to raise more money through Treasury bills and bonds, which would also serve the purpose of mopping up excess cash in the economy.
It was carried out by Josiah Aduda, Ronald Chogii and Thomas Murayi Maina from the Department of Finance and Accounting at the University.
“The government should raise more money through Treasury bills and bonds since it has a direct effect on the economic growth. This will have a double effect of influencing economic growth and also reducing inflation that would otherwise be caused by excess money in the hands of individuals in the economy,” said the researchers.
Due to the impact the market has on the growth of the economy, they recommend it should be more closely supervised to prevent the collapse of local brokerages.
The dons used the stock market turnover ratio and the bond market turnover ratio to make conclusions about the influence of deepening the market on GDP.
The turnover ratio is equal to the total volume traded divided by market capitalisation. It is a measure of liquidity and a high ratio indicates low transaction cost in the capital market, the scholars said.
Besides the stock and bond market turnover, the other variable that had a significant impact on the GDP is stock market size, which refers to the number of listings on a stock exchange.
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