Sri Lanka new taxes to encourage bank deposits over Treasuries

ECONOMYNEXT – New taxes effective from April 2018 could drive capital away from Treasury bill and bond markets to commercial banks due to a large tax incentive available, especially for individuals.

Under the existing regime, a 10 percent withholding tax was the final tax for individuals. For companies, there was a 10 percent tax credit, which was paid upfront. For individuals, there will be a final unrecoverable 5 percent tax next year, up from 2.5 percent now for bank deposits.

For provident funds, which are taxed at 14 percent, clubs and societies at 28 percent, financial institutions and other firms at 28 percent, the 5 percent credit is available.

Under current law, there is a 10 percent tax credit above the quoted interest rate due to prepaid taxes, with only the balance liability to be paid. Holders of bonds ‘gross up’ on the quoted rate to declare income.

In a controversial move, credit for taxes already paid until they reach maturity is being denied for holders of bonds, which analysts say could amount to a novel way of a state expropriating unarmed citizens.

Related story: Uncertainty roils Sri Lanka bond markets after tax reversals

Under the new law, pension funds will be liable at 14 percent, and financial institutions, companies and clubs will be liable at 28 percent.

Individual holders of government securities will be liable at progressive rates from 4 to 24 percent, giving a strong incentive to move to bank deposits, which are taxed at only 5 percent, unless Treasuries yields rise sharply.

Deputy Treasury Secretary S R Attygalle told a business forum organised by the Ceylon Chamber of Commerce that the gap existed, after the danger people moving away from Treasuries markets was pointed out by a participant.

He quipped that, with budget deficits due to fall in the future, there may be a lower requirement for borrowings.





But, holders of Treasuries will also be liable for capital gains tax at 10 percent, and be able to claim capital losses.

Foreign investors in bonds who were earlier paying only the upfront 10 percent tax will be caught in the new regime, tax experts have said.

The arrangements on how to open tax files for foreign investors is not yet clear. (Colombo/Sept14/2017)

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