Taxes dampen USE prospects

Jul 06, 2005

ANALYSIS<br><br>THE turnover at the Uganda Securities Exchange (USE) hit record highs in the last financial year but concerns are that a punitive tax structure stands in the way of future growth.

ANALYSIS

By Peter Kaujju

THE turnover at the Uganda Securities Exchange (USE) hit record highs in the last financial year but concerns are that a punitive tax structure stands in the way of future growth.

In the last six months to June 30, sh3.1b turnover was recorded compared to sh93m in the same period the previous year.

“The 2005 semi-annual turnover constitutes 50.79% of the total turnover recorded at the USE since the first trading on January 2000. More than half of all shares, which have exchanged hands at the USE, have done so in the first six months of 2005,” Davis Gathaara of MBEA Stock Brokerage Services said.

“There was high interest in the market, boosting the turnover compared to the previous years. Activity on the local equities was on the high during the period due to big foreign portfolio and institutional investors.

“But there is need for the Government to give more incentives particularly the removal or reduction of the 15% withholding tax on dividend,” Simon Rutega, the USE chief executive officer said.

Rutega said increased performance represented people’s confidence in the bourse, which is increasingly becoming popular.

Increased volumes also came in the wake of most companies announcing positive results, including dividends.

dfcu, which listed on the exchange last November, accounted for the biggest turnover.

It gave a dividend of sh18.42 per share and a bonus share for every four ordinary shares.

Uganda Clays gave dividend of sh500 per ordinary share, skyrocketing the share price to sh12,000 from sh8,000.

This made it the most expensive local stock on the exchange.

New Vision, which listed last December, gave a dividend of sh4.90 per share. The share price closed June at sh205.

British American Tobacco did not give dividend. Its share price closed at sh735.

Bank of Baroda gave a dividend of sh60 per share, closing at sh850 per share.

The all share index, which is the performance indicator, hit a record high of 622.28 points in June from 377.25 at the beginning of the year.

This was attributed to an increase in the share price of various stocks.

Market capitalisation stood at sh30,134b during the period under review.

Winnie Tarinyeba, the legal and compliance manager at the Capital Markets Authority, said the market was increasingly responding to corporate action.

“The high trade volumes and share prices are market response to corporate action.

“Companies announced results, dividends and others gave share bonuses, which attracted more investors,” Tarinyeba said.

She said most Ugandans now understood how the stock exchange works.

Tarinyeba said the collective investment schemes, started late last year, had enhanced liquidity at the exchange by providing savings and investment opportunities.

Rutega said they expect more cross listings from Kenya this year.

Currently, Kenya Airways and East African Breweries are the only cross listed equities.

Analysts, however, say there is urgent need for incentives.

“The 30% corporation tax is high.

“It should be reduced,” said an analyst.

In the recent budget, the finance minister, Dr Ezra Suruma, only scrapped the 15% withholding tax on collective investment schemes.

Gary Watson, a financial analyst with African Alliance Uganda, said, “The taxation of dividends is a ‘double taxation’ because Income Tax has already been paid on the earnings by the company.

“So when an investor buys shares in a company, they end up paying 45% on the income of their investment.”

He said the tax is a major impediment to the growth of the share market.

Watson hoped that dividend income would be made tax-free like in many countries.

“The long-term growth of the capital markets will end up generating large amounts of tax if investors are encouraged to invest, which currently they are not,” he said.

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