Tax Reforms: A game changer for DSE growth
TANZANIA: TAX reforms have a direct impact on a number of sectors, including the stock exchange and are essential in determining the direction of the economy.
One important venue where these reforms are being felt strongly in Tanzania is the Dar es Salaam Stock Exchange (DSE).
The Daily News has gathered insights from bourse experts on how changes in taxation policies can influence investor confidence, trading volumes and the overall health of the market.
Below are their perspectives on the topic, as well as areas that need improvement to establish a more effective tax system for the country’s sustainable growth.
TAX reforms have a direct impact on a number of sectors, including the stock exchange and are essential in determining the direction of the economy. One important venue where these reforms are being felt strongly in Tanzania is the Dar es Salaam Stock Exchange (DSE).
The Daily News has gathered insights from bourse experts on how changes in taxation policies can influence investor confidence, trading volumes and the overall health of the market.
Below are their perspectives on the topic, as well as areas that need improvement to establish a more effective tax system for the country’s sustainable growth; Market activity, capital flows and investment decisions are all greatly impacted by tax reforms.
As indicators of economic health, stock exchanges flourish under settings that encourage investment. With an emphasis on the DSE specifically, this article examines the connection between stock exchanges and tax policies.
The Role of Tax Reforms in Stock Market Development
Tax reforms can stimulate market growth by reducing transaction costs, improving investor confidence and enhancing liquidity. Countries with tax-advantaged jurisdictions typically attract more investment, both domestic and foreign.
Policies such as reduced capital gains tax, tax incentives for listed companies and streamlined taxation procedures foster broader market participation and encourage long-term investments. Conversely, excessive taxation can stifle market activity, shrink trading volumes and deter investment.
A balanced tax environment is essential to support stock market growth and overall economic stability. For example, the imposition of excessive taxes on financial transactions can significantly hinder the flow of capital.
On the other hand, creating taxfriendly policies for trading and investments encourages investors to take calculated risks, thus boosting market activity and facilitating economic progress. The impact of a robust tax system on stock market development cannot be overstated.
It encourages diversified investments and attracts both foreign and local participants. For Tanzanians, a competitive tax regime in the DSE could also instill a culture of saving and investing in the stock market, which would help create wealth over time.
Taxation and Its Current Impact on the DSE
The DSE plays a vital role in capital formation and connecting businesses with investors.
However, the exchange’s growth is hindered by a taxation framework that, while necessary for revenue generation, limits market activity. Key tax policies currently affect investor behaviour, market liquidity and the exchange’s competitiveness.
The 10 per cent capital gains tax on profits from securities trading, although moderate by global standards, discourages speculative trading, a key driver of market liquidity.
A more flexible tax structure could encourage higher trading volumes, benefiting both investors and the broader market.
Reducing the capital gains tax would particularly benefit short-term traders who add liquidity to the market, thereby enabling faster capital turnover. This could potentially lead to higher revenues for both the government and private investors.
Similarly, the 10 per cent withholding tax on dividends reduces net returns for investors, particularly foreign ones. This added cost diminishes the DSE’s competitiveness compared to regional exchanges.
Adjusting this tax could attract international capital, enhancing market liquidity and increasing the DSE’s stature as a regional exchange hub. Investors often evaluate the tax treatment of dividends when deciding where to allocate capital and less onerous taxation could tip the scales in favour of the DSE.
While listed companies enjoy a reduced corporate tax rate of 25 per cent, limited awareness of this incentive undermines its potential. Promoting this benefit could encourage more companies to list on the DSE, increasing investment options and helping the exchange meet its growth objectives.
Corporate tax incentives could be expanded to cover emerging industries, such as technology and renewable energy, which would appeal to both investors and entrepreneurs. High transaction costs, particularly brokerage fees, disproportionately affect retail investors.
Reducing these costs, or offering incentives such as tax-free accounts for retail investors, could expand market participation and foster a stronger investment culture. With more retail investors entering the market, the DSE could witness enhanced liquidity and a wider variety of traded securities.
The Potential Impact of Tax Reforms on the DSE
Targeted tax reforms could enhance the performance and attractiveness of the DSE, unlocking growth opportunities and contributing to Tanzania’s economic development. Reducing or waiving capital gains tax on securities trading could boost short-term trading volumes and attract more participants.
Lowering dividend withholding tax for foreign investors would make the DSE more competitive regionally, drawing in international capital and expertise.
In turn, this would support the development of a more liquid market and foster a stronger connection between Tanzanian companies and international investors. Introducing tax incentives for long-term investors could stabilise the market by encouraging strategic investments.
Investors who hold onto their securities for extended periods offer much-needed stability, particularly in the face of market volatility.
By offering incentives such as reduced tax rates on long-term holdings, Tanzania could attract more institutional investors who have the capacity to withstand market fluctuations. Additionally, tax breaks for retail investors would increase participation and enhance market resilience.
ALSO READ: Tanzania’s tax system: Components, revenue sources
Expanding corporate tax incentives would motivate more businesses to list on the DSE, diversifying investment opportunities and strengthening the exchange’s role in capital mobilisation. By fostering a diverse range of listed companies, from SMEs to large multinational corporations, Tanzania could attract investors looking for different risk profiles and investment options.
Finally, offering tax relief on digital transactions would attract younger, tech-savvy investors, aligning with modern trading behaviours and making the market more inclusive. The ease of access through digital platforms, combined with tax incentives, would appeal to a generation of investors comfortable with online trading and mobile finance tools.
Tax Reforms in Other Markets
Tax reforms have proven to drive market growth globally. In India, reforms that incentivised long-term holdings while moderating short-term capital gains taxes significantly enhanced market stability. These measures attracted both institutional and retail investors, creating a balanced ecosystem that supported long-term growth. Singapore’s exemption from capital gains tax and incentives for companies to list have made it a global financial hub.
The country’s low transaction costs and streamlined tax processes further boost its market competitiveness, attracting international investment.
By offering a favourable environment for both companies and investors, Singapore has been able to position itself as a regional leader in financial markets. In Kenya, the temporary removal of capital gains tax in the early 2000s sparked a surge in trading activity on the Nairobi Securities Exchange, demonstrating how tax policy can stimulate market vibrancy, even if only for a limited time.
The move boosted investor confidence, increased liquidity and expanded the exchange’s investor base.
Recommendations for Tax Reforms in Tanzania
Tanzania could benefit from revising the capital gains tax to introduce a tiered system or provide exemptions for reinvested gains. Implementing tax-free accounts, similar to the UK’s Individual Savings Accounts (ISAs), would encourage long-term participation by retail investors.
This approach would allow investors to accumulate wealth over time while ensuring that their gains are not eroded by taxes. To encourage more companies to list on the DSE, additional tax breaks could be offered to firms that meet certain criteria, such as job creation or achieving Environmental, Social and Governance (ESG) goals.
Simplifying tax compliance for both individuals and institutional investors would reduce administrative barriers, making the DSE a more attractive investment destination.
By reducing the complexity of tax reporting, Tanzania could improve investor confidence and encourage more participation in the stock market. Public awareness campaigns are vital to ensure that investors and companies understand and take advantage of these tax incentives.
By educating stakeholders, the government and regulatory bodies can drive broader engagement and maximise the impact of reforms. Public outreach through digital channels, seminars and workshops could help demystify the stock market and tax policies, increasing investor participation and fostering economic literacy.
Finally, benchmarking Tanzania’s tax policies against those of neighbouring countries will help ensure that the DSE remains competitive within the East African Community, fostering regional integration and growth. By aligning tax policies with international standards, Tanzania can position itself as an attractive investment destination in the wider African market.
Key challenges SMEs face when listing on the DSE include a lack of awareness about capital markets and the high upfront costs associated with listing. Incubatory programmes like DSE’s DEAP and ENDELEZA are addressing this gap.
Another challenge is the difficulty of meeting the advisory fees needed for listing, which many SME founders cannot afford. Establishing a bridge financing mechanism could help SMEs cover these costs and list on the DSE.
Technological Solutions and Market Accessibility
Technological solutions have played a key role in advancing financial inclusion in Tanzania.
The DSE’s Mobile Trading Platform (MTP) and M-Pesa integration with the DSE have significantly increased retail investor participation. Since the launch of M-Pesa integration, over 400 new CDS accounts were opened within days.
Lessons from Global Markets
Tanzania could draw valuable lessons from global markets like Singapore and India. The government could exempt VAT on transaction fees to stimulate market activity, as the market remains nascent and brokerage firms still require investment to expand.
Analysis of SMEs shows that SMEs could become primary taxpayers in Tanzania, despite facing challenges like limited access to financing. SMEs account for over 60 percent of national income but struggle to expand due to financing barriers and a lack of financial literacy.
Improving financial access would enable SMEs to contribute more significantly to the tax base and drive national economic growth.
Final Thoughts
Tax reforms, if strategically implemented, have the potential to unlock the full growth potential of the DSE and drive broader economic development in Tanzania. Improving access to financing for SMEs could significantly expand the tax base and increase contributions to the economy.
Weight should also be thrown behind technological solutions and bridging financing gaps to make the market more accessible to SMEs and retail investors.
Furthermore, reducing capital gains tax and offering targeted incentives could boost market liquidity and attract both domestic and international investors and encourage long-term participation. Generally, these insights underline the critical role of tax policy in shaping a dynamic, inclusive and thriving capital market ecosystem, with the DSE at its heart.
Tax reforms hold significant potential to invigorate the DSE and contribute to Tanzania’s broader economic development.
By strategically adjusting policies related to capital gains tax, dividend withholding tax and retail investor incentives, Tanzania can attract more participants, enhance liquidity and strengthen the DSE’s role in capital mobilisation.
Drawing on global best practices and tailoring reforms to local needs will help create a vibrant and inclusive capital market ecosystem that benefits all stakeholders.
