Investment in Thailand's bond market is projected to drop by several billions of baht after the Finance Ministry's planned imposition of a 15% withholding tax on fixed income funds next year, says an investment source.
An investment industry source said the tax collection plan is pending approval and is expected to become effective next year.
The source said the average annual return on bond investment is currently around 2% compared with a 1.25% return on deposit interest. Once the measure is implemented, return on bond investment will be close to that of deposit interest, which will prompt investment funds to shift from the bond market to bank deposits, which carry lower investment risk.
A report surfaced in May that the Finance Ministry was poised to levy the withholding tax on gains from investment in fixed-income funds. At present, those earning more than 20,000 baht in interest from banks' savings accounts and those parking money in time-deposit accounts are subject to the 15% withholding tax.
The Finance Ministry is seeking new sources of revenue to finance big-ticket infrastructure projects, sustain fiscal positions and balance out the income tax structure.
The source said total investment in the mutual fund industry is around 5 trillion baht, of which 80-85% is invested in bonds or fixed-income funds. On the other hand, the total amount of bank deposits is around 14 trillion baht.
The government will be able to collect tax from a combined 18 trillion baht of fixed-income funds and bank deposits.
"However, this is a rough forecast on the impact of taxation. Investment flows could shift to other investment products or offshore assets instead of shifting to local bank deposit accounts," said the source.
The Finance Ministry, however, could end up with a lower collection than expected from the planned tax on fixed-income funds as it would reduce the incentives to invest in the bond market, said the source.
If investment flows shift towards bank deposits, banks would shoulder greater deposit interest expense and may have to lower the interest on savings to reduce such cost, said the source.
Another possible effect from the planned withholding tax is the likely difficulty corporations would face in raising funds from the bond market as they will have to offer higher returns than deposit interest, a move that will increase funding costs, said the source.
The outlook for investment in fixed-income funds is gloomy, not merely because of negative sentiment towards the Finance Ministry's withholding tax plan. Industry pessimism has arisen from the increase in the interest rate cycle by the US Federal Reserve together with its plan to reduce the central bank's massive balance sheet, said the source.
