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Thursday December 9th, 2021
Economy

Effective tax on Sri Lanka banks could go up to 70-pct with new ‘super gains’ tax

ECONOMYNEXT – The effective tax rate on Sri Lanka banks is expected to be around 70 percent for the past financial year after a ‘super gains’ style tax was proposed for the second time and a so-called ‘financial VAT’ was increased, a tax expert said.

Sri Lanka in the budget for 2022 proposed a windfall tax of 25 percent for large companies which had earned over 2.0 billion rupees in the financial year that is just ending.

A so-called financial VAT was also increased by 3 percent to 18 percent, reversing a 2019 sudden removal of a tax called the Nation Building Tax.

“Most banks earn over two billion rupees in Sri Lanka,” Duminda Hulangamuwa Senior Partner and Head of Tax of Ernst and Young in Sri Lanka told representatives of the top German brands in Sri Lanka.

“Their effective tax rates will go up in my view, with the 25 percent and 3 percent, to about 70 percent for the last financial year.”

Ad Hoc policies

Sri Lanka’s elected ruling class had brought the ‘super gains tax’ in 2015 after the so-called ‘100 day’ splurge which destabilized the budget.

In 2015 spending to gross domestic product surged to 20.9 percent from 17.3 percent in 2014, and the deficit went up to 7.6 percent from 5.7 percent.

In December 2019 taxes were slashed without a sitting parliament again de-stabilizing finances.

The deficit in 2020 went up to 13.9 percent of GDP from 6.8 percent, though some payments made in 2020 was pushed back to the previous year to show an 11.1 percent of GDP deficit.

The elected ruling class at the time had promised the super gains tax, which was retrospective, will be a ‘one time only’ tax but had opened Pandora box of tax uncertainty which punishes large companies.

Meanwhile Hulangamuwa said the then Prime Minister had promised that it will be never repeated.

“When the Super Gains Tax was implemented in 2016 by the then government I remember the Prime Minister in parliament saying this is the only time they are going to charge the tax,” he said.

“Now a subsequent government is in charge.”

In 2020 after cutting taxes Sri Lanka’s central bank went on a money printing spree to keep rates down, triggering a balance of payments crisis, sending the rupee down to 203 from 182 and creating parallel exchange rates.

Similar policies were followed in 2015 injecting large volumes of liquidity triggering a currency crisis which sent the rupee down from 131 to 151 to the US dollar. (Colombo/Nov23/2021)

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