Taipei, Sept. 2 (CNA) A tax reform proposed by the Ministry of Finance (MOF) is expected to encourage more local retail investors to enter the equity market and facilitate the development of the bourse, according to analysts and scholars.

Chao Yung-fei, president of Capital Securities Corp., told the CNA that the proposed reform aims to ease equity investors' financial burden by cutting their tax payment on dividends they receive from investments in listed companies in Taiwan.

Once the tax on dividend income is lowered, Chao said, the local equity market is expected to become more attractive to retail investors who will likely become more willing to raise their equity holdings.

That could boost daily turnover in the local bourse, Chao said, adding that as long as turnover increases, securities brokerages will also become beneficiaries under the tax reform.

As part of the government's efforts to revise the current tax code which aims to bring fairness to the country's tax system, the MOF proposed on Friday to eliminate the imputation tax system.

Ratified in 1998, it awards local investors who receive dividends from a company tax credits for taxes paid by the company.

But in 2015, the imputation system was revised, cutting the tax credits awarded to investors in half, a move which sparked an outcry among local investors who then had to pay higher taxes, higher than the 20 percent foreign institutional investors have to pay on their dividend income.

With such an uneven tax system on dividend income, many major local market players who trade no less than NT$500 million (US$16.55 million) in equities in a single quarter have left the trading floor. As a result, the local equity market has been dominated by foreign institutional investors.

While proposing to eliminate the imputation system, the MOF has proposed two alternative tax plans.

Plan A will allow investors to enjoy tax free status on 37 percent of dividends they receive and the remaining dividends will be taxed as their personal income tax.

Plan B will include two options: Option 1 will allow equity investors to be taxed on a flat rate of 26 percent, while the second choice will tax all of the dividend income as personal income tax, but give tax payers a tax deduction of up to NT$80,000.

As for foreign investors, the MOF has proposed a tax rate on their dividend income at 21 percent, up from the current 20 percent.

Sun Ke-nan, a professor at National Taipei University of Business, said that if the government adopts the first plan, retail investors will see their tax rate cut to about 25.2 percent, which will come closer to foreign institutional investors' 21 percent.

Sun said the second plan will be good for high income earners if they choose to pay a flat rate of 26 percent.

To pursue a fairer tax system, he said, the government should consider a move to raise the tax rate for foreign investors to 25 percent, while under Plan A for local investors, the tax deduction ceiling should be hiked to 40 percent from the proposed 37 percent.

Chien Hung-ming, chief secretary of the Securities and Futures Bureau of the Financial Supervisory Commission, said that he has faith the tax reform on dividend income will pave the way for more retail investors to buy equities and improve the local equity market.

In addition to a plan to eliminate the imputation tax system, the MOF has also proposed a reduction of the maximum individual income tax rate from 45 percent to 40 percent, a cut in the tax rate on corporate retained earnings to 5 percent from 10 percent, and an increase in three types of individual income tax deductions.