Surcharge tax slapped on group companies and partnerships among other entities

• Dividends made deductible when assessing holding company taxable income to ensure no double taxation effect 
• Private sector disappointed over retrospective nature of the tax 
• Says taxes like this seriously disrupt business and investment decisions 
• Opposition lawmaker says tax will apply on EPF profits

The one off Surcharge Tax of 25 percent on companies whose taxable income exceed Rs.2.0 billion has been levied on individuals, partnerships and group companies causing some concern for holding companies, which have subsidiaries. 
However, the gazette notification on the tax issued on February 7 has ensured that the dividends received from subsidiaries are excluded to avoid double taxation when assessing the taxable income, assuaging many concerns the holding companies had since the retrospective tax was announced in the budget last year. 
There were serious concerns when the tax was originally announced last year whether it would apply to holding companies and if so, whether the dividend incomes received would be made tax deductible to avoid room for double taxation. 

The Surcharge tax must be paid in two tranches—in March and in June this year—on the assessment made on the taxable income for the assessment years commencing on April 1, 2020.  “Every individual, partnership, company and the subsidiaries and the holding company of every group of company liable to pay the tax under this Act, shall pay the tax in two equal installments on or before, the thirty first day of March and thirtieth day of June of 2022, to the Commissioner- General,” the gazette notification stated. 
The budget 2022 proposed to tax individuals and companies whose taxable incomes exceed Rs.2.0 billion for the year of assessment commencing on April 1, 2020, repeating the bad habit of taxing past incomes and profits.
The practice was first started by the ousted good governance regime when they charged a Super Gains Tax. Practices like this make doing business in Sri Lanka a nightmare. Sri Lanka’s foreign direct investments track record is the worst in the South Asian region, recent data showed. 
Speaking on the one off tax Haresh Somashantha, Director Finance at Royal Ceramics Lanka PLC a few weeks ago said the Surcharge Tax puts them in limbo as all decisions on distribution of profits and investments had already been taken. 
While decisions on investments may be able to be reversed, none of the other decisions on profit allocations could be changed, he added. 
The taxes such as these have serious effects on corporate decision-making, Somashantha pointed out.
Meanwhile Harsha De Silva, an Opposition parliamentarian charged that the gazette, “under disguise, the government has included the Employees Provident Fund (EPF) to the list of companies making over Rs.2 billion. This is the first time ever that the EPF is subjected to a massive tax of 25 percent”. 
However, the gazette had no reference to the EPF nor any annuity fund.  De Silva estimated Rs.65 billion in tax on the EPF from the Surcharge Tax based on the Rs.250 billion plus profit made by the EPF in 2020. 
However, the entire tax income which is budgeted to be collected from the Surcharge Tax is Rs.100 billion and the Finance Minister initially said the Tax would be applied on only about 60 companies.
However, the government is yet to respond to De Silva’s claims, which could spark outrage among the working population if his claims are proven to be true.