Banks get tax breathing space from the removal of DRL
Government’s action in abolishing the Debt Repayment Levy (DRL) with effect from January 1 this year could inflict Rs. 20 billion in losses in tax revenue affecting the debt sustainability exercise of the country, tax consultants said.
However they noted that the banks will gain from this action and it can pass the benefit to customers as they will have cash in hand.
The local banking sector welcomed the move stating that that it is a respite for them at a time when the Government’s relief packages including moratoriums for tourism and Small and Medium-scale Enterprises ( SMEs) eat up millions of rupees from their profits.
Several leading bank General Managers told the Business Times that DRL is a burden for banks at a time when the bulk of the economy’s weight has fallen on them, in the aftermath of the Easter Sunday attacks.
As approved by the Cabinet of Ministers and instructed by the Ministry of Finance, DRL has been abolished with effect from January 1 pending parliamentary approval for amendment to the Finance Act, No. 35 of 2018.
Accordingly, financial institutions are not subject to DRL with effect from January 1, the Inland Revenue Department announced.
However, DRL payment for the month of December 2019 is required to be paid on or before January 20, 2020 and the return for the financial year should be submitted as usual, an IRD official said.
According to the 2018 Budget, a 0.2 per cent levy has been charged on total cash transactions of banks, the second largest new revenue measure in the budget, aiming to collect Rs. 20 billion during the year, he disclosed.
It was specified that the levy should be paid by the financial institutions, without passing on the burden on to their customers.
The Finance Ministry at that time 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.
The banking sector pays over 60 per cent of its profits at present as taxes, up from earlier 50 per cent, making Sri Lanka perhaps the only or one of a few countries that has a very high effective tax rate on banks.
In certain instances, some banks paid as much as Rs.600 million as DRL during the quarter ended March 31, 2019, which comes to about Rs.3 billion a year from the profits of a single bank, the IRD official said.
Veteran tax consultant and Senior Partner, Gajma & Co, N. R. Gajendran told the Business Times that the abolishing of the DRL will enhance the profitability of banks enabling it to pass the benefits for customers.
Banks can easily bring down lending rates for borrowings while offering reasonable interest rates for depositors, he said adding that the Central Bank’s latest reduction in policy rates supports a continued reduction in market lending rates, thereby facilitating the envisaged recovery in economic activity.
He said the DRL 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 rationale that was given was to reduce the cash circulation in the country.
He noted that 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.
It was another levy on the bank’s profits, he said, adding that banks will have to pass this benefit of removing the levy to customers as it is expected the bottom-line improvement to be significant in 2020.
As approved by the Cabinet of Ministers and instructed by the Ministry of Finance, DRL has been abolished with effect from January 1 pending parliamentary approval for amendment to the Finance Act, No. 35 of 2018.