15 November 2021 09:33 am Views - 171
The one time surcharge tax imposed retrospectively on individuals and companies from the budget 2022 immediately ignited debate to make it the hot button issue among private sector stakeholders due to its violation of basic tax principles such as equity and its application to the past incomes, as the proposal had caught many off guard.
According to Duminda Hulangamuwa, a Senior Partner and the Head of Tax at Ernst & Young Sri Lanka, the tax lacks clarity over its application across people and firms who pay income tax at different rates and asked why only those who already pay tax were subjected to this tax.
Finance Minister Basil Rajapaksa presenting his maiden budget last Friday proposed to impose a one-time 25 percent surcharge tax on those whose taxable income is over Rs.2.0 billion for the financial year ending in 2020/21.
This tax is a reminiscent of the Super Gains Tax proposed by the good governance regime no sooner they came to power in 2015, but under a vastly different context.
“There is a growing argument since the proposal was announced as to why only the tax paying companies should be paying this 25 percent. They already contribute to the Treasury in the form of taxes.
So why can’t you tax those who don’t pay income tax?” Hulangamuwa asked speaking at a post budget forum organized by the Centre for Banking Studies at the Central Bank on Saturday.
He also sought clarity from authorities in respect of the potential for double taxing in the case of subsidiaries making a taxable income in excess of Rs.2.0 billion individually, and the group which may earn a taxable income exceeding Rs.2.0 billion out of the dividend incomes received from all subsidiaries.
Hulangamuwa also said due to its retrospective nature, those who are subject to the tax may not have the cash to pay the tax as they may have had already declared dividends and re-invested the profits.
“So, where the cash to pay is what a lot of people ask because this is based on last year’s profit,” he stressed.
While there was a drumbeat of calls for raising taxes, including from the formal private sector to overcome the virus induced-fiscal woes which spilled into the external sector and many others, a tax in the style and size of the surcharge tax appears to have caught the private sector off guard as they are already heavy tax payers.
Speaking at the same forum, Jonathan Alles, Chief Executive Officer at Hatton National Bank PLC said the effective tax rate of the banking sector could top 70 percent of income with the surcharge tax coming into play.
“If this 25 percent kicks in for payment in terms of cash flow along with a 24 percent and an 18 percent VAT, that’s almost like 70 percent of your cash flows going out in the forms of tax and for which you have not earned some of those cash flows in 2022 which needs to be looked at,” he said.
However, Governor of the Central Bank Ajith Nivard Cabraal said the surcharge tax was brought in by the government with a specific reason, which is to meet the elevated expenditure and the loss of incomes caused by the virus resurgence.
Besides this one-off tax he said the 2022 budget by and large had followed consistent policies in respect of taxes and other growth fostering policies enunciated by the government since 2019. “The only change has been the imposition of a surcharge which I think many people would understand and appreciate, is for a good reason. In the sense that we all know there has been substantial expenditure that has to be met by the government in relation to the COVID situation as well as in the aftermath of COVID,” Cabraal said delivering the keynote speech at the forum.
However, Alles said the retrospective taxes, although had been used many times in the past could damage foreign investor confidence at a time when the country is yearning for such income.
“While supporting the government’s short- term cash flow requirements, from time-to-time we go overseas, and we ask investors to come and invest in Sri Lanka. But then we need to walk the talk,” he said adding that these kinds of taxes on past profits wouldn’t bode well on foreign investors.
Speaking further Alles pointed out that such tax money left with the banking and the broader financial sector has the ability to create ten times more money by way of loans and advances which becomes possible by augmenting banks’ capital.
“Banks are in a unique position, unlike whatever the savings that is expected from, say Rs.100 billion, it is only Rs.100 billion for the government. But that money with the finance sector and with the banks worth a trillion because banks have this capacity to augment their capital 10 times over and lend it,” he added. With nearly 10,000 branches spread across the country and the targeted lending to identified priority economic sectors such as exports, women entrepreneurship, agriculture, technology, renewable energy etc., is already happening, Alles is of the belief that the resource allocation would be much more targeted and efficient under the banking and finance sector than by the government which struggles to do so.
Meanwhile, speaking at the same forum, Thilak Piyadigama, the Chief Executive Officer at Sanasa Development Bank PLC cautioned that the surcharge tax could subdue the loan growth, specially to the SMEs and the rural sector.
“Obviously when there is no retained capital, it can have a serous negative impact on credit growth,” Piyadigama stressed.
Sri Lanka’s private sector credit growth in absolute terms slumped in September to less than Rs.30 billion after reaching a multi-hear high of Rs.134 billion in August due to subdued sentiments sparked by the virus resurgence, the foreign exchange crunch and the uptick in interest rates.