Discrimination against PAYE tax payers on house ownership arising from new Budget proposals

I write to congratulate President Mahinda Rajapaksa for an excellent Budget, which includes some far-reaching proposals which should no doubt encourage development of the economy and the country.

However, I would like to draw attention to one Budget proposal which causes a serious discrimination/anomaly to millions of PAYE payers, which would now even include Government servants and the entirety of the salaried private sector.

This arises out the proposal to make PAYE Tax a final tax without permitting any other deductions out of same. While the concept of simplifying the tax structure is much appreciated, it would be appropriate, if not essential, to consider the following also:

While a large group of PAYE tax payers who will now include Government servants and private sector employees would be deprived of setting off interest on housing against their income tax, other categories such as sole proprietors, self employed persons and partners engaged in partnership business are able to do so, even though both groups enjoy the same benefit of reduced tax in the new Budget proposal.

As a result, there could be a sharp decrease in the demand for housing which in turn will impact very adversely on national growth as construction activity is a vital part of national growth.

Quite apart from the above, home ownership has been universally recognised the world over as a desirable feature for any society and most countries provide relief/incentives for same. The new budget proposals would take away all incentives for housing as far as the PAYE group of tax payers are concerned and perhaps even make house ownership beyond their reach as housing is far from cheap in Sri Lanka.

Quite apart from discriminating against such a large group of tax payers, it would also place many who have also contracted long term loans for the purchase of house/apartments in a serious financial situation where they may not be able to meet the loan commitments they contracted for on the basis that interest would be available as a 100% deduction against their employment income. The relief offered by reducing the tax rate from 35% to 24% and widening the tax slabs will not compensate for the 100% deductibility that was offered previously. In either case many of the lower level salaried employees were not paying tax at the highest rates.

It is appreciated that the Budget proposals were introduced with a view of rationalising the tax structure, which is to be applauded. Therefore, a solution in line with the said requirement is also given below where the same end objective could be achieved while removing the discrimination/anomaly and injustice caused to the PAYE category of employees through the budget proposal.

nIt is proposed that the responsibility for checking and effecting the interest deduction for housing be placed on the employer. To qualify for such deduction, original confirmations from banks/approved financial institutions of loans they have obtained for housing related activities should be provided and be filed with the employer.

nThe Employer will inform the Department of Inland Revenue of any deductions to be made from the tax payable on account of such loan commitments for housing.

nThe Department of Inland Revenue would test check as considered necessary such deductions calling for documentary evidence from the employer.

The above, if implemented will eliminate the anomaly/discrimination and be fair to all categories of tax payers, while placing the burden for evaluating the defector tax direction on the employer, thereby not being a burden in terms of effort to the Tax Department.

The millions of PAYE employees who now include Government servants will be extremely grateful if you could ensure the above so that the serious discrimination/anomaly against PAYE employees on housing incentives are removed, while at the same time not hindering the desire of the Government to simplify the tax structure.



G. Peiris

Kandy