Taxation of financial assets: implications for capital market development in Tanzania.

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University of Dar es Salaam
The main objective of this study has been to examine the effect of tax policy on the profitability of financial assets with emphasis on equities and its implication on the Tanzanian capital market development. The period covered is May 1998 - December 2002. Pre-tax, after-tax rates of return and effective tax rates on five financial assets are calculated as a means of defining the impact of taxation an each asset to measure the disincentive to investment resulting from taxation. Although taxation significantly reduces returns on all the five assets, listed equities are the least taxed assets of all financial assets due to tax incentives they enjoy. As such, the tax policy is not an obstacle to investors' participation an the capital market, but rather it enhances the demand for the market instruments. Prevalent tax incentives have been successful in laying a good foundation in promoting capital market development and they came with little negative fiscal impact due to the insignificant contribution of financial taxes to total government revenues. However, these incentives are geared to stimulate demand than supply of capital market instruments, as they do not encourage companies from the private sector to source funds through the capital market. The study recommends increased tax incentives to further stimulate supply side of the stock market through reduced corporate taxation for listed companies. Listed companies should also be allowed to carry forward capital losses arising from investments in the capital market against total taxable income. Moreover, efforts need to be increased to enhance ordinary Tanzanians' awareness an the workings of the stock market and its resulting benefit.
Taxation, Capital markets, Public finance, Tanzania
Isinika, E. C. (2003). Taxation of financial assets: implications for capital market development in Tanzania. Masters dissertation, University of Dar es Salaam. Available at (