Taxation on banks could change with fresh instructions on provisions for expected credit losses

• Analysts say any instructions to treat collective impairments as an allowable expense could effectively lessen banks’ tax burden

Although the government largely left the taxes untouched, including that of the banking sector, in Budget 2021, the fresh instructions slated to be issued on how to treat loan loss provisions for tax purposes from next year onwards, could alter the taxation of the banking sector.

Individual impairments under the expected credit losses or provisions made for possible loan defaults of individually large exposures are treated as an allowable expense for corporate income tax purposes by the Inland Revenue Department (IRD), while the collective impairments are spared. 

“I also propose to issue relevant instructions under the Inland Revenue Act to ensure better and transparent management with regard to the provisions for anticipated losses of loans and doubtful loans in calculating taxes of banks and financial institutions,” Prime Minister Mahinda Rajapaksa told Parliament on Tuesday, delivering the government’s maiden budget, in his capacity as the Finance Minister.

Banking sector analysts said that any instructions to also treat collective impairments as an allowable expense, could effectively lessen the banks’ tax burden. 

The banks’ profits are now taxed at 24 percent after President Gotabaya Rajapaksa’s government overhauled the taxes in November 2019. However, the banks are still taxing their profits at 28 percent, as the amendment is yet to be enacted. 

Meanwhile, dovetailing the tax incentives announced to lure more companies to list, the government proposed to amend the laws, allowing the commercial banks to operate as investment banks, by which way higher traffic for new listings can be facilitated. 

“I further propose to amend the necessary laws to enable commercial banks to also act as investment banks, with the view to enhancing the diversification of the finance sector,” Prime Minister Rajapaksa said. 

The move will effectively bring down costs having to be incurred by applicants for listings, as they have a wider choice and this is another step toward broadening the country’s capital market.