Share-Market Tax Revenue Falls Rs 6.19 Billion as Investor Profits Shrink

KATHMANDU — The government’s capital gains tax collection from Nepal’s share market fell by more than Rs 6.19 billion in fiscal year 2025/26, reflecting weaker investor profits and subdued market activity during much of the year.

Investors paid Rs 10.35 billion in capital gains tax on share transactions during the fiscal year, according to the available data. The collection was 37.43 percent lower than the Rs 16.54 billion raised in the previous year.

The decline means the government lost more than one-third of the revenue it had earned from profitable share sales a year earlier.

Unlike taxes collected on the total value of share transactions, capital gains tax is charged only when investors sell securities at a profit. A fall in collection therefore generally indicates that fewer profitable transactions took place, gains became smaller, or investors chose not to sell while market prices remained weak.

The latest figures suggest that the slowdown in Nepal’s share market affected not only investors and brokerage businesses but also government revenue.

Tax collection drops by more than a third

Capital gains tax collection declined from Rs 16.54 billion in fiscal year 2024/25 to Rs 10.35 billion in 2025/26.

In absolute terms, revenue fell by approximately Rs 6.19 billion. The decline is equivalent to an average monthly revenue loss of more than Rs 516 million compared with the previous year.

The previous fiscal year’s collection had represented the highest annual capital gains tax revenue generated from share transactions in the past decade. The latest decline therefore partly reflects comparison with an unusually strong base.

Nevertheless, a contraction of more than 37 percent is substantial. It indicates that the market was unable to maintain the level of profitable trading recorded during the preceding year.

The fall also shows that higher transaction volume alone is not enough to raise capital gains tax. Investors must sell shares above their purchase price for the government to receive the tax.

When prices weaken or remain below investors’ acquisition costs, shareholders may continue to trade but record little taxable profit. Others may hold their shares and wait for prices to recover, reducing both market turnover and tax collection.

Early months record sharp contraction

Capital gains tax collection remained below the previous year’s level during several major months of the fiscal year.

In Shrawan, collection fell by 49.09 percent compared with the same month a year earlier. The decline widened to 76.68 percent in Bhadra, indicating a particularly weak start to the year.

Collection dropped by 58.46 percent in Asoj and by 58.54 percent in Falgun.

These declines suggest that market weakness was not limited to a single period. Investor profitability remained under pressure during both the early and later parts of the fiscal year.

A fall of more than 76 percent in Bhadra indicates either a sharp reduction in profitable sales, an unusually high collection in the same month of the previous year, or a combination of both.

Without complete monthly figures for transaction turnover and the benchmark index, the precise contribution of each factor cannot be measured. However, the repeated year-on-year declines show that taxable gains were considerably weaker across several months.

Temporary recovery in Magh and Chaitra

The downward trend was not uniform throughout the year.

In Magh, capital gains tax collection increased by 22.21 percent to Rs 129.1 million compared with the same month of the previous year.

A stronger improvement was recorded in Chaitra, when collection rose by 150.26 percent to more than Rs 173.5 million.

The sharp percentage increase in Chaitra may appear significant, but it should be interpreted alongside the relatively small amount collected. A high growth rate can result when the comparison period had an exceptionally low revenue base.

The collection of Rs 173.5 million in Chaitra represented less than 2 percent of the annual capital gains tax total.

The improvement therefore points to a temporary rise in profitable trading rather than a full recovery capable of reversing the annual decline.

To determine whether the market had entered a sustained improvement phase, similar growth would need to continue for several months and be supported by stronger turnover, broader price gains and participation across different groups of listed companies.

Capital gains tax functions as a market barometer

Capital gains tax is among the government revenues most closely connected to investor sentiment.

During a bullish market, rising share prices allow investors to sell their holdings at a profit. More transactions become taxable, and the government’s collection increases rapidly.

During a bearish or stagnant market, the opposite occurs. Investors face losses, avoid selling or realise only limited gains. Tax collection then falls even when the number of registered investors remains high.

The latest figures therefore provide an indirect measure of the share market’s performance.

A 37.43 percent reduction in tax collection suggests that realised investor profits contracted substantially during the year. It may also indicate that gains were concentrated among fewer investors or in shorter periods of market recovery.

The impact extends beyond tax revenue. Lower profitability can weaken investor confidence, reduce trading commissions earned by brokers and limit demand for new public offerings.

It can also affect financial institutions that provide margin lending or hold shares as part of their investment portfolios.

Collection returns to the level recorded four years earlier

Over the past 10 fiscal years, the government has collected more than Rs 63.41 billion in capital gains tax from share transactions.

The highest collection was recorded in fiscal year 2024/25, when revenue reached Rs 16.54 billion.

The government had collected Rs 14.14 billion in fiscal year 2020/21, another period associated with strong market activity and rising share prices.

Collection stood at Rs 10.35 billion in fiscal year 2021/22. The latest fiscal year’s revenue, at about Rs 10.35 billion, was almost identical to that amount.

The difference between the collections in 2021/22 and 2025/26 was less than Rs 2 million, despite a gap of four fiscal years.

This comparison suggests that the share market has not produced a steady upward trend in tax revenue. Instead, collection has moved sharply according to market cycles.

At the lower end, the government collected only Rs 507.6 million in fiscal year 2017/18. The latest annual collection was more than 20 times that amount.

Such variation demonstrates the expansion of Nepal’s share market over the longer term. At the same time, it confirms that revenue from the sector remains highly unpredictable.

Two strong years account for a large share of decade-long revenue

The Rs 16.54 billion collected in fiscal year 2024/25 accounted for more than one-fourth of the entire capital gains tax collected over the past decade.

When combined with the Rs 14.14 billion collected in fiscal year 2020/21, the two strongest years generated approximately Rs 30.68 billion.

That amount represents nearly half of the Rs 63.41 billion collected over the 10-year period.

The heavy concentration of revenue in a few bullish years illustrates the government’s vulnerability to stock-market fluctuations.

Capital gains tax may provide a large fiscal gain when the market is rising, but it cannot be treated as a stable source of revenue for recurrent expenditure.

Government revenue planning based on an unusually strong stock-market year can create shortfalls when the market enters a correction.

The decline in 2025/26 provides a clear example. If authorities had expected the previous year’s Rs 16.54 billion collection to continue, the actual outcome would have left a gap of more than Rs 6 billion.

Lower tax does not necessarily mean lower investor participation

The fall in capital gains tax should not automatically be interpreted as proof that all investor activity declined by the same proportion.

The tax is based on profit, not solely on transaction value. Investors can buy and sell large volumes of shares without generating significant capital gains.

For example, an investor who sells shares at the original purchase price pays no capital gains tax, even though the transaction contributes to market turnover.

Similarly, an investor selling at a loss does not create taxable capital gains. During periods of market weakness, loss-making transactions may increase as investors rebalance portfolios or require cash.

A proper assessment would therefore require comparison with the Nepal Stock Exchange index, total annual turnover, the number of transactions and the number of active investors.

However, the scale of the tax decline strongly indicates that the value of realised profits fell.

Government revenue becomes exposed to market sentiment

The government’s growing collection from share transactions shows that the capital market has become an important part of Nepal’s revenue system.

But the latest decline also exposes the limits of depending on market-linked taxes.

Revenue from salaries, business income, consumption and property may fluctuate with the economy, but share-market capital gains can rise or fall much more sharply within a short period.

Investor psychology plays a major role. Political developments, monetary policy, interest rates, banking liquidity, regulatory changes and company earnings can quickly affect share prices and trading decisions.

A market decline can therefore reduce government revenue even without a wider economic recession.

For fiscal planning, capital gains tax from shares should be treated as a variable or windfall source rather than a predictable annual stream.

Revenue earned during a bullish year could be used cautiously, rather than being assumed as a permanent base for future spending.

Market recovery would improve revenue, but policy credibility matters

A sustained recovery in the share market could once again increase capital gains tax collection.

Lower interest rates, improved corporate earnings, stronger economic growth and rising investor confidence generally support share prices and trading activity.

However, revenue should not be increased by encouraging speculative trading alone.

A healthy capital market requires transparent listed companies, timely financial reporting, strong regulation, protection of minority shareholders and effective action against insider trading and price manipulation.

The government and regulators also need to maintain predictable tax policies. Frequent changes in capital gains tax rates or confusion over whether share trading should be classified as investment or business income can discourage long-term participation.

A stable policy environment would allow investors to make decisions based on company performance rather than uncertainty over taxation.

Annual decline reflects weaker realised gains

The Rs 10.35 billion collected in fiscal year 2025/26 remains significant by historical standards. It is far higher than the amounts collected during the earlier years of Nepal’s capital-market development.

But compared with the record collection of the previous year, the decline is pronounced.

The data show that government revenue from the share market rose rapidly during bullish periods but could not be sustained when investor profits weakened.

The central message is therefore not simply that tax collection fell by Rs 6.19 billion.

It is that Nepal’s share-market revenue remains tied to short and unpredictable market cycles. Until the capital market becomes broader, deeper and more closely supported by the real economy, capital gains tax will continue to rise sharply in good years and decline just as quickly when investor confidence weakens.