Banking News – Investors in Nepal’s stock market have raised serious concerns over being required to pay capital gains tax even when selling shares at a loss, particularly in the case of bonus shares and rights shares. They argue that the current Weighted Average Cost Calculation (WACC) system no longer allows them to update the actual acquisition cost of such shares, resulting in tax being calculated on an inaccurate cost basis.

Previously, investors could edit the purchase price of bonus and rights shares through the Mero Share system to reflect their actual acquisition cost. However, CDSC (Central Depository System and Clearing Ltd.) removed the price edit feature, meaning the system now automatically treats the face value (Rs. 100 or Rs. 10 per share) as the acquisition cost.

As a result, investors who sell their original shares before bonus or rights shares are credited to their accounts can end up paying capital gains tax despite incurring an overall investment loss.

How the Current System Creates Tax on Losses

For example, an investor purchases 1,000 shares at Rs. 1,000 each in a company that announces a 1:1 bonus share. After the book closure, the market price adjusts to around Rs. 500 per share.

If the investor waits until the bonus shares are credited, the WACC is automatically adjusted, and taxation is calculated fairly. However, if the investor sells the original shares before receiving the bonus shares, the system still records the original purchase cost at Rs. 1,000, resulting in no tax because the shares were sold at a loss.

Later, when the bonus shares are credited, the system records their acquisition cost as zero. If those bonus shares are sold at Rs. 400 per share, the entire amount is treated as a capital gain, even though the investor has suffered an overall loss. Consequently, the system deducts capital gains tax despite there being no real profit.

A similar issue occurs with rights shares, where the system considers the acquisition cost to be only the face value, rather than the investor’s actual weighted average investment cost.

Stock Brokers Suggest Two Solutions

According to Nitesh Kumar Agrawal, Vice President of the Stock Brokers Association of Nepal, the issue stems from a technical flaw in Nepal’s WACC calculation system.

He said stakeholders have proposed two key solutions:

• Ensure bonus and rights shares are listed within two to three days of the record date, similar to international markets.
• Allow the CDSC system to automatically identify bonus and rights entitlements and adjust the Weighted Average Cost Calculation (WACC) before the bonus shares are credited, eliminating the need for manual corrections.

According to Agrawal, such measures would allow investors to sell shares without facing unfair taxation, while ensuring the government receives the correct amount of capital gains tax.

Background of the WACC Dispute

The controversy dates back to May 2018, during the tenure of then Finance Minister Dr. Yubaraj Khatiwada, when the Inland Revenue Department decided that bonus shares would have a cost price of zero, while rights shares would be treated as having a cost of Rs. 100 per share for capital gains tax purposes.

Before that decision, the adjusted market price following bonus and rights issues had been used to determine the acquisition cost.

The government’s decision drew strong criticism from investors, who argued that using only the face value ignored the actual investment cost, artificially increasing taxable gains.

Following widespread protests and a sharp decline in the stock market, the government suspended the implementation of the new system and continued using the weighted average cost method. A government task force was also formed to review the issue.

Removal of the Price Edit Facility

Determining the correct acquisition cost became increasingly complicated because investors purchase shares at different prices over time and may receive multiple bonus and rights issues.

To address this, investors were previously allowed to manually update their WACC through the Mero Share platform.

However, the Office of the Auditor General later warned that allowing investors to edit purchase prices created a risk of tax evasion, as users could intentionally understate acquisition costs.

Based on that recommendation, CDSC removed the price editing feature, leaving investors unable to correct the acquisition cost of bonus and rights shares.

CDSC Says It Is Following Government Directives

According to CDSC spokesperson Suresh Neupane, the organization is aware of investors’ complaints but insists it is implementing directives issued by the tax authorities rather than acting independently.

He explained that the removal of the price editing facility was intended to prevent capital gains tax evasion, following recommendations from the Office of the Auditor General.

Investors Demand a Fairer Tax System

Investors argue that the government should identify and penalize tax evaders individually instead of applying a system that forces all investors to pay tax even when they incur genuine losses.

They say brokers receive daily complaints from investors whose transactions result in capital gains tax deductions despite generating negative returns.

Market participants further argue that during the current bearish market, such a taxation mechanism discourages investment, reduces liquidity, and places an unnecessary burden on genuine investors.

According to investors, capital gains tax should be based on actual economic profit, not on a technical calculation that ignores the true acquisition cost after bonus and rights share adjustments.