Budget 2022 to bite off Rs. 90 b from financial services sector as taxation soars to 70%

Multiple proposals in Budget 2022 is to bite off over Rs. 90 billion from the banking and finance sector, according to estimates by NDB Securities whilst Ernst & Young said taxation on banks would soar to 70%.

The biggest impact of Rs. 74.3 billion will be on the banks and Rs. 17 billion on Non-Bank Financial Institutions (NBFIs).

The Budget 2022 presented on Friday by Finance Minister Basil Rajapaksa proposed an increase on VAT to 18% from 15% on financial services and NDB Securities estimated it to have a Rs. 8.5 billion impact. The one-off surcharge tax of 25% to have an impact of Rs. 36.7 billion. For its forecast, NDB Securities calculated turnover tax on interest income. “If the tax base is net interest income, the impact will be Rs. 11 billion,” it added.

The hit from the 2.5% social security levy on turnover is estimated at Rs. 29 billion. 

For its forecast NDB Securities used Y/E 31.12.2020 banking sector aggregate financials and considered following banks for the impact analysis on surcharge tax (taxable income over Rs. 2 billion): BOC, People’s Bank, NSB, COMB, HNB, SAMP, NDB, NTB, DFCC, PABC and SEYB.

“When it is difficult to clearly identify taxable income, we’ve used pre-tax profit for  our analysis,” it added.

E&Y said since most banks are  likely to be liable to the tax surcharge there is likely to be a reduction in the VAT FS liability since the Profit before tax (PBT) of the banks is likely to reduce due to the tax surcharge, despite the increase of 3% in the VAT FS rate.

“However, as a result of the tax surcharge and the increased VAT FS a typical bank's total tax liability would increase significantly,” E&Y said, suggesting it to be 70% from the present 53%.

On NBFIs, NDB Securities said that the biggest hit (Rs. 10 billion) will be via the one-off surcharge tax of 25% and Rs. 5.5 billion from the social security levy and Rs. 1.7 billion via increase in VAT.

It calculated turnover tax on interest income. “If the tax base is net interest income, the impact will be Rs. 3 billion,” it added. It also used Y/E 31.03.2021 NBFI sector aggregate financials for this analysis.

NDB Securities considered following companies for the impact analysis on surcharge tax (taxable income over Rs. 2 billion): LFIN, PLC, CFIN, VFIN,  CLC, COCR, CDB and LOFC. “When it is difficult to clearly identify taxable income, we’ve used pre-tax profit for our analysis,” it added.