Expert says debt repayment levy ends up 0.25% on financial VAT

• Stresses disconnection between original levy proposal and current form as normal bank levy
• Says banks will only comply with new IR Act rates from 1 April, first three months will be paid according to old Act
• Given policy uncertainties, market speculates implementation of IR Act will be put off
• Bank exemptions, overseas income, bank employees concessionary interest rates will be no more 

By Charumini de Silva

The much-discussed debt repayment levy proposed in the 2018 Budget is now ending up as 0.25% of the financial VAT, which is slated to come into effect from 1 April, a veteran in the industry confirmed yesterday (26 March).

“The Finance Ministry have now decided that the levy will be based on the percentage of the financial VAT, which is 0.25%,” KPMG Sri Lanka Managing Partner Reyaz Mihular said yesterday, at a seminar organised by the Ceylon Chamber of Commerce on overcoming the regulatory and compliance challenges in the banking sector. 

According to the 2018 Budget, a 0.2% levy will be charged on total cash transactions, the second largest new revenue measure in the Budget, aiming to collect Rs. 20 billion during the year. It was specified that the levy should be paid by the financial institutions, without passing on the burden on to their customers.  

He said the transaction levy (according to 2017 Budget) was meant to be introduced to discourage cash transactions, where banks cannot pass on the levy to their customers and it must be absorbed by financial institutions. 

“The Budget spoke of putting a levy on cash transactions, and then there was confusion on cash or all transactions. Then the banks found it very difficult in categorising the transactions to apply the levy, and everything was too much of a headache. 

However, the rationale that was given was to reduce the cash circulation in the country. There were very lofty ideas that were talked about, but finally now what it is ending up as is 0.25% of the financial VAT,” Mihular stressed.

He stressed that there was a disconnection between what the levy was put forward to do, which was to try and reduce cash circulation, and how it has ended up as a normal levy to the banks.

“So, it is another levy on the bank’s profits,” he emphasised.

The Finance Ministry earlier pointed out that the banking industry understands that the Government had to introduce the levy to address vulnerabilities in the economy for the next three years.

In terms of the new Inland Revenue Act (IR Act), he said the banks will only comply with it for the nine months starting from 1 April. 

“Banks functions on the 12-month rule which ends in December. What happens to January to March? So, the banks are asking why they need to compromise according to the new rate, when the new Act comes into effect from 1 April. The compromise is that although it is a little too cumbersome, the banks will pay for the first three months according to the old Act, and the next nine months according to the new Act,” he stated. 

Despite the fact that the Inland Revenue Department (IRD) naturally seeks to apply the new Act to all months because it needs higher income, banks being banks do not want to pay for the first three months according to the new Act.

“Banks know what’s good for them,” Mihular quipped.

Given the policy uncertainties in the country, Mihular said there were speculations among professionals in enacting the new Inland Revenue Act from 1 April. “Last week, I was attending a few functions and people were saying it might be put off and anything was possible.”

Highlighting another gloomy area for the banking sector, he noted that seven of the exemptions that the banks traditionally used to enjoy, will now be scrutinised under the new Act.

“The good old days of holding the overseas income, exemptions, parking loans at different places are all gone. Also, the Government will tax the bank employees’ interest rates concessions. People joined banks because of the low interest rates they get to enjoy. But now young ladies and gentlemen from the banking sector, you are going to be taxed on the difference of the concessionary interests and the normal interests. That’s the sad part of it,” he added.