No reason to discontinue tax benefit for equity funds
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The decision to give money to farmers, which was announced by the government on Wednesday, is one of its short-term stimulus measures to try to boost economic growth in the remaining three months of this year.
Perhaps the government should consider providing tax benefits to the middle-class as a long-term measure.
Over the past few months, the talk of the town among the middle class has been whether people will continue to have the right to claim tax when buying long-term equity funds (LTF) – currently valid until 2016 – or not.
The tax benefits from LTF investments, initiated in 2004, aim to stabilise the Stock Exchange of Thailand (SET) by increasing the proportion of institutional investors.
LTF unit trust investments are tax deductible for up to 15 per cent of taxable income annually or the deduction must not exceed Bt500,000, whichever is lower.
For example, someone earning a net income of Bt1 million a year will have to pay Bt115,000 in income tax. But if they buy as many LTF unit trusts as possible at the full deductible capacity, they would save Bt30,000 in tax.
Under the General Prayut Chan-o-cha government, newly appointed Finance Minister Sommai Phasee said he would look into the LTF issue.
But many people in the asset management sector already have many reasons for why they believe the tax incentive should be extended beyond 2016.
The following three reasons may be sufficient:
First, the funds help create savings through the tax incentive and that could balance bank deposits and other kinds of savings via stocks, debentures and other financial instruments.
Second, the funds help stabilise the market and provide it with more protection against adverse situations such as a global financial crisis, when many investors panic and sell stocks. In the past, the bourse fluctuated a lot due to foreign investor’s moves but now they cannot dominate it as much.
The SET Index did not drop sharply despite the big shock resulting from the military coup on May 22 after the protracted political impasse. The index did not fall below 1,300 points.
The main reason for the resilience was the large volume of capital which flew into LTFs in the last quarter in 2013 and cushioned the stock market. That typically occurs.
Lastly, people receiving the greatest tax benefit from their fund contribution are not the rich, as has been claimed.
They are mostly “middle class”.
According to a Federation of Thai Capital Market Organisations study, people earning between Bt150,000 and Bt300,000 a year receive the biggest tax break from LTFs at 60 per cent and that includes investments in retirement funds.
It said people earning more than Bt4 million – representing only 0.8 per cent of the total 2.57 million people subject to taxes – received a tax break of less than 20 per cent. That rate is not attractive enough for the rich.
If LTFs result in people saving more money, there is no reason to discontinue the tax benefit.
