Dipping into people’s savings

It was that day, four times a month when Karthelis – the fishmonger, would come along on his motorbike with a box full of fish. The fish is fresh and Karthelis is a very reliable trader; thus he has brisk sales in the neighbourhood.

Parked outside our gate,( Karthelis was weighing a kilo of ‘salayo’ when he was asked by Kussi Amma Sera: “Karthelis, oyata puluwanda oyage pavula balaganna ethiwenna salli humba-karanna maalu vikunala “Karthelis, are you able to make enough money on fish sales to look after your family)?”

“Maasa keepayakata udadi, hondata salli hamba-wuna. Eth den jeewana viyadama wahalen ihalata gihilla. Eka hinda sadakalika aragalayak mei davas wala (Until about a few months ago the money was good. However, the cost of living has gone through the roof and it’s an eternal struggle these days),” he explained.

“Ow, thama kiri-piti saha boomithel walata polim thiyenawa samahara palath wala (Yes the queues for milk powder and kerosene can still be seen in some areas),” added Mabel Rasthiyadu.

“Janadhipathi thuma saha agamethi thuma anuradhapure meetimaka badada porondu wuna deval ikmanata Honda wei kiyala. Mama balaporoththu wenawa egollo hari kiyala (The President and the Prime Minister on Wednesday at a public rally in Anuradhapura have promised that things would get better soon. I hope they are right),” noted Serapina.

Listening to their conversation, with a mug of tea in one hand and a newspaper in the other, I stumbled on a news item about the crisis over the new surcharge tax. At that moment, the phone rang; it was ‘Reconditioned’ Ranjith – a know-all on the second-hand car market.

“They have gone and done it again,” said Ranjith, after my warm greeting.

“What do you mean?” I asked. “Well …implementing another one-off tax and this time they are dipping into our money – the Employees’ Provident Fund (EPF) and the Employees’ Trust Fund (ETF). That is very unfair and should be challenged in a court of law,” said Ranjith, sounding frustrated.

Sensing this was a good topic to write about, I spoke to Ranjith for a few minutes more and then excused myself and began researching about the issue.

The Surcharge Tax, which was announced in the Budget 2022 presented last November, is a one-off tax where individuals and companies are taxed 25 per cent on taxable incomes that exceed Rs. 2 billion. The tax is proposed to raise Rs. 100 billion for the government and would apply for the assessment year 2020/21 – a period in which companies have already paid their taxes.

“In the case of a group of companies, if the aggregate taxable income of the holding company and subsidiaries exceeds Rs. 2 billion for the Y/A 2020/21, then each of those companies are liable to pay 25 per cent of its taxable income, although when taken in isolation the taxable income of each single company is below the Rs. 2 billion threshold,” according to one tax expert.

What triggered widespread discussion on this tax was the publication of the bill last week to enforce this tax which would now be presented to Parliament and, thereafter, can be challenged in the Supreme Court, if someone or an organisation decides to do so.

While the fact that this tax was anyway going to be implemented – two months after its announcement – was nothing new, what has created a stir is that the EPF and the ETF would also be taxed under this law; a move which even disturbed Labour Minister Nimal Siripala de Silva who expressed his dismay in Parliament earlier this week when the issue was raised. “Our ministry’s position is clear: the EPF and ETF should not be taxed and the position of the Inland Revenue Department is wrong,” he told Parliament.

Other opposition legislators including Opposition Leader Sajith Premadasa also raised concerns over the move, saying the government should not be taxing the people’s savings to fund their grand development projects with an eye on elections. Opposition legislators are urging that the two superannuation funds should be exempt from any taxation.

According to official data, the EPF, Sri Lanka’s largest fund, is worth Rs. 3 trillion and has generated a profit of around Rs. 250 billion. If the 25 per cent tax is enforced, the EPF would have to fork out over Rs. 62 billion to the government coffers. This is the third instance where the government of the day has tried (and succeeded in some instances) to dip into EPF funds.

The fund invests mainly in gilt-edged securities like government treasury bills and bonds which are safe and secure but during the tenure of the previous Mahinda Rajapakse-led 20102015 government, the EPF invested in companies listed in the stock market some of which were in the red.

Then again in around 2018, there was another attempt by the EPF to re-enter the stock market amidst allegations of mismanagement of the EPF’s earlier equity investments. The argument put forward by the EPF management was that its members would benefit from high returns compared to safe but lower returns from government securities. However, trade unions raised a hue and a cry over these moves and the matter ended there.

While the move to tax the EPF and ETF has stirred the all-too-familiar controversy, the other issue is the inconsistent tax policy of all governments resorting to tax amnesties followed by one-off taxes which have become a trend these days and result in double taxation for some companies.

According to experts, this hampers corporate planning. “This is a very bad policy followed by governments as these ad hoc measures are not good for planning and are a deterrent for foreign investments,” one expert said. The surcharge tax also covers Board of Investment companies.

The government’s tax collection was affected when President Gotabaya Rajapaksa reduced taxes in a late-2019 move. According to official data, while revenue during January-October 2021 was Rs. 1.1 trillion, recurrent expenditure was Rs. 2.3 trillion with the deficit being Rs. 1.2 trillion. The need for several more billions of rupees for the new 100,000 projects of the government would add to the financing headaches –with most of it coming from the surcharge tax revenue.

The government’s tax policy is lopsided. On one hand it condemns tax defaulters, then offers an amnesty followed by a one-off tax which is implemented not on rogue traders but legitimate taxpayers who have been paying their taxes diligently over the years.

As I sipped my second mug of tea brought into the room by Kussi Amma Sera, I was reminded of the famous quote by Benjamin Franklin: “In this world nothing is certain but death and taxes.”