Seeing red in blue-green Lanka

An agitated Kussi Amma Sera was red in the face (anger, not embarrassment) after something she appeared to have read in Thursday morning’s newspaper.

A vociferous reader, peering occasionally to see the big print with an old set of spectacles, she spends at least 30 minutes in the morning while preparing tea scanning the headlines of the paper like any smart reader and then selects what she should read and what should be passed on.

This morning, she is involved in an overthe-fence, chit-chat with Serapina (often amusing to passers-by due to their loud conversation interspersed with high-pitched laughter or high-pitched anger, depending on the content).

This time it sounded serious. Again, without giving any indication that I was listening to their conversation from my work-room from where I could clearly see them through the window, I heard snatches of the conversation which went like this:

“They are taxing hard-earned money sent by our people in the Middle East”

“Are you sure? Eke hari wedak neda (this is a fine state of affairs)?

“Meka hari asadaranai (this is unfair).” “Apey sallee ekka manthri-la sel-lung karanawa (parliamentarians are playing with our money).”

While pondering on their conversation and looking at a blank wall wondering what today’s topic should be, the phone rings. It’s my banker ‘amba yahaluwa' (mango friend) Seeni Bola on the line. He earned this sobriquet after once boasting that other banks were handling ‘seeni bola’ (peanut) deposits compared to his bank!

“I say, there is a hue and cry over the new taxes on deposits,” he says in a baritone voice over the phone (ideally suited to be in a choir). “Say what?” I ask.

“My banker friends say there is some misunderstanding over new taxes on these accounts. People are calling the banks and complaining,” he said.

“What’s the issue?”

“That there is a tax on all deposits and money sent by our migrant workers will be taxed. This is a misunderstanding of this budget tax,” he added.

Realising that this is an issue that needs to be addressed and politely ending the conversation after promising to call later, I find that this was the problem that Kussi Amma Sera and Serapina were discussing over the fence and as usual, bashing the politicians without a clear understanding of who and what is being taxed.

However, this misunderstanding and treading into the unknown by many people is a reflection of the Government’s poor communication mechanism showing time and time again its inability to explain to the people with clarity, taxes that directly affect them.

For the record, even at the Business Times there were people calling and complaining about the unfair taxes on deposits and that this would further reduce remittances from abroad. Separately, banks are still waiting for clarity on the tax on transactions called the Debt Repayment Levy which is also enforceable on April 1.

The bone of contention is Circular No. SEC/2018/01 to banks and financial institutions titled ‘Withholding tax (WHT) on interest paid by banks or other financial institutions’ issued by the Department of Inland Revenue (DIR).

Dated March 16, the circular sets out the taxes on interest effective from April 1 which customers have learnt, triggering concern and in some cases hysteria by depositors that a new tax is being enforced.

A WHT of 5 per cent is being imposed on the interest income of a deposit account, increasing from 2.5 per cent earlier. In the case of senior citizens, the 5 per cent WHT is being applied on aggregated interest income (from all deposits) above an annual income of Rs. 1.5 million (or Rs. 125,000).

This 5 per cent WHT on interest income is being enforced for the first time on foreign remittances which applies to export earnings and money sent home by Sri Lankan migrant workers, the last named being the subject of conversation by Kussi Amma Sera and Serapina.

Bankers believe the tax on interest income on foreign earnings could be a disincentive to exporters to bring back their money. On the other hand, it is unlikely to make a major dent in remittances by Sri Lankan workers abroad, many of whom send money to keep the homefires burning and hardly have any cash left in accounts to earn interest.

Nevertheless, the Government is sending the wrong signal by taxing foreign remittances which serves as a disincentive rather than an encouragement to bring your money home.

Having said that, taxes are an integral part of the functioning of a state in providing public services like free health and free education (for all, irrespective of whether you are rich or poor), subsidised transport (railways and buses, again without discrimination) and other services.

While taxes need to be collected, the issue is whether the authorities over the years have got the tax structure right and there lies the problem. There aren’t enough people paying income tax in Sri Lanka (particularly those who should be taxed!) reflecting the inefficiency of the DIR and compelling the government to resort to indirect taxes which are easier to collect.

This problem was also alluded to recently by Senior Minister Sarath Amunugama (a former, distinguished civil servant) at a public forum, where he said that one of the major problems in the economy is that revenue from traditional sources of taxation (income tax) hasn’t worked.

He said people have to be taxed, particularly those who have the ability to pay and because this is not happening there are distortions in the economy where indirect taxes are higher than direct taxes. Indirect taxes now bring in 80 per cent of the tax revenue, whereas the ideal ratio should be 60 per cent in direct taxes and 40 per cent indirect.

But, he noted, because of the inability of the DIR to bring more people under the income tax net, administrations are forced to resort to indirect taxes to meet the govern- ment’s spending needs.

Eventually, everyone ends up paying consumption taxes where there is no discrimination on the ability to pay. The poor pays the same tax as the rich on consumption goods, which is unequal, unfair and unjust with the worst affected being the middle class who are sandwiched between the upper class and the working class.

The WHT on interest income was announced in the 2017 budget but as usual in technical jargon that no one except tax advisors understand. It is meant to confuse the public, at least that’s the people’s perception. One of the reasons why accountants and audit firms immediately issue a statement the day after the budget explaining to clients the changes in taxes is because corporates are also unable to understand clearly the changes, particularly the exemptions. If that is the case, how does one expect the public to understand taxes that affect them?

In fact, the November-presented budget said that regulations would be announced later in the case of bank interest paid to senior citizens. If the banks don’t inform customers of these changes (and in this case, with the circular being issued just two weeks before its enforcement), how are people expected to know?

Furthermore the tax on interest income on migrant workers’ remittances, the biggest foreign exchange earner for the Government, should have been explained clearly to the public, instead of worried customers calling banks a few days before the April 1 rule to express their concerns. The March 16 circular should have been issued in January or early February and banks directed (this should have been stated in the budget, if it’s not a common practice) to inform their customers of these changes.

Taxing the people is inevitable but failure in proper communication of those decisions has been the bane of this Government compelling Kussi Amma Sera and her ilk to see red in the Government’s supposedly acclaimed “bluegreen” budget exercise.