Stock market shows red flag on budget, Three sector indices hit hard

KATHMANDU: The Nepal Stock Exchange (NEPSE) witnessed a negative reaction on the first trading day after the announcement of the fiscal year 2083/84 budget, as investors expressed dissatisfaction over key capital market-related provisions.

The budget presented by Finance Minister Dr. Swarnim Wagle on Friday included several measures related to the securities market, but ambiguity and changes in taxation policy have triggered investor concerns, reflected in Monday’s market performance.

Market Falls as Investor Sentiment Weakens

On Monday, the NEPSE index dropped by 26.72 points (0.96 percent), closing at 2,755 points. The market showed volatility in early trading but entered a sustained downward trend after 11:37 AM, reaching an intraday low of 2,746 points at 2:38 PM.

Out of total listed stocks, 35 companies gained, while 233 declined and 2 remained unchanged. Trading volume also declined to Rs 5.61 billion, down from Rs 6.03 billion recorded in the previous session.

Capital Gains Tax Controversy Weighs on Market

A key factor behind investor disappointment is the government’s revised capital gains tax structure. The budget increased capital gains tax by 2.5 percentage points, setting it at 10 percent for short-term gains (less than one year) and 7.5 percent for long-term gains (over one year).

Although the budget described capital gains tax as “final,” provisions in the finance bill suggest that for annual income above Rs 4 million, the tax may not be treated as fully final, creating confusion among investors.

Market participants say this inconsistency has negatively affected sentiment.

“The budget and the finance bill seem contradictory regarding whether capital gains tax is final or not. This has impacted the market today,” said a brokerage operator. “However, the impact may not be long-lasting.”

Sectoral Indices Show Mixed Reaction

Budget-related announcements had a strong impact on three key sectoral indices: others, non-life insurance, and trading, while other sectors saw moderate declines.

The “Others” group index rose by 3.36 percent, driven largely by a sharp 15 percent increase in Nepal Reinsurance Company, following the government’s decision to ensure 20 percent reinsurance business allocation to the company.

The non-life insurance index increased by 1.37 percent, supported by the budget’s decision to double third-party accident insurance coverage to Rs 1 million, which is expected to boost premium income for insurers.

In contrast, the trading sector plunged by 6.14 percent, primarily due to a sharp 6.95 percent decline in Bishal Bazar Company, one of only two companies in the group. The budget announcement regarding a reduction in government stake in the company and plans to offer shares to the public contributed to the decline.

Broad Market Weakness Across Most Sectors

Other major sector indices also ended in negative territory:

• Banking: down 0.99 percent
• Development Bank: down 0.81 percent
• Finance: down 0.50 percent
• Hotels & Tourism: down 1.40 percent
• Hydropower: down 1.97 percent
• Investment: down 1.22 percent
• Life Insurance: down 0.79 percent
• Manufacturing & Processing: down 1.42 percent
• Microfinance: down 0.90 percent

Despite the overall decline, a few individual stocks saw strong gains. Kalinchowk Hydropower rose 15 percent, while Central Finance gained 5.76 percent. On the downside, Bungul Hydropower fell 13.20 percent and Crest Micro Life Insurance dropped 6.95 percent.

Heavy Trading Activity in Energy and Insurance Stocks

In terms of turnover, the most actively traded stocks included Aankhu Khola Hydropower, Nepal Reinsurance Company, Himalayan Reinsurance, Ridi Power, and National Hydro Power.

Why Are Investors Worried?

Market analysts point to uncertainty surrounding capital gains taxation as the primary reason for investor disappointment. The perception that capital gains tax may not be fully “final” for higher-income individuals has created confusion.

Under income tax rules, individuals earning more than Rs 4 million annually are required to file income declarations, further complicating the interpretation of the new tax structure.

An industry insider noted that while the market reaction is sharp, it may be temporary if regulatory clarity is provided.

Finance Minister Wagle, in a post-budget briefing, attempted to clarify the issue but acknowledged some confusion regarding income above Rs 4 million. However, he reiterated that capital gains tax remains “final” in principle and insisted there would be no double taxation.

Despite this clarification, investors remain cautious as they await further regulatory and policy clarity from authorities.