Capital market left behind in FY26 budget

The national budget for FY2025-26 has disappointed capital market stakeholders. Despite persistent bearish trends, declining investor confidence, and repeated calls for reform, the budget offers little in terms of meaningful support for the country's capital market.

Although the Finance Division attempted to present the budget as investment and business-friendly, market participants will struggle to find any substantial incentives capable of reversing over a decade of stagnation. Aside from a symbolic tax cut for merchant banks, most policy recommendations have been ignored or watered down, leaving the market rudderless.

One clear measure is the reduction of corporate tax for merchant banks from 37.5 percent to 27.5 percent. This cut may ease some financial pressure on these intermediaries, who play key roles in underwriting, portfolio management, and capital raising. While welcome, the benefit is narrow and unlikely to attract substantial new investment or revive the market on its own.

The budget also lowers the source tax on stock trading from 0.05 percent to 0.03 percent. Though this may, in theory, encourage trading, the actual impact will likely be limited. Investor confidence remains stifled by deeper issues, including inconsistent policies, weak regulation, and poor returns. Without wider reforms, such token moves are unlikely to improve sentiment or market performance.

A major letdown is the decision not to withdraw or revise the 15 percent capital gains tax on individuals earning more than Tk 50 lakh in annual profits. Introduced last year, the tax has already dampened sentiment, especially among high-net-worth individuals who are vital for liquidity and long-term stability. Despite repeated appeals from market associations and both stock exchanges, the government remained unresponsive, risking further outflows of capital.

The tax gap between listed and non-listed companies has been reduced from 7.5 percent to 5 percent. This weakens the incentive for private firms to go public. Market participants have long advocated for widening the gap to at least 10 percent to stimulate IPO activity and broaden public participation. Instead, the narrowing may deter new listings and undermine transparency and good governance.

The budget also overlooks essential elements of a modern capital market. There is no mention of developing a bond market or introducing regulatory incentives for institutional investors. Proposals such as green bonds aligned with ESG standards, or tax breaks for mutual funds, insurance firms, and pension funds, were left out. These omissions are troubling, particularly given the need for long-term capital and the stabilising role institutional investors provide.

Adding to the concern, there are no new measures for IPOs, SMEs, or alternative trading platforms. Small and medium-sized firms that depend on market access for growth were hoping for fiscal support or easier access to finance. Likewise, calls to remove double taxation on dividends and grant tax relief to mutual funds remain unmet. Altogether, this neglect signals a broader failure to build a modern, inclusive market ecosystem that supports innovation, investment, and resilience.

The FY2025-26 budget was a chance for the government to address structural weaknesses in the capital market, vital for long-term growth, employment, and industrial development. Instead, it follows a pattern of neglect.

While the corporate tax cut for merchant banks is a modest concession, it is outweighed by the persistence of capital gains tax on individuals, the shrinking tax gap for listed companies, and the absence of broader support for bonds, institutional investors, and SME participation.

If Bangladesh genuinely wants to build a vibrant and inclusive market, the government must go beyond token measures. It must commit to investor-focused reforms that improve transparency, deepen liquidity, and diversify financial products. Regrettably, this budget falls short, yet another missed opportunity.

The writer is a capital market analyst and can be reached at [email protected].