Surcharge Tax catches state/ private institutions off-guard

Sri Lanka’s public and private income generating institutions including groups of companies, partnerships, banks and individuals with taxable income of over Rs. 2 billion will get a bashing from the 25 per cent one-off Surcharge Tax inflicting a cascading effect on the economy, several tax experts said.

This tax is aimed at collecting Rs.100 billion for government’s rural development initiative hitting profit- making public and private sector institutions alike, they explained. According to official provisional estimates, three state- owned banks and several profit- making state institutions, around 62 big companies and several banks in the private sector will be badly hit by this tax.

The tax is with retrospective effect from the year of assessment starting from April 2020. It has to be paid in two tranches in March and June 2022.

A sum of Rs. 5.75 billion is to be taxed from the Bank of Ceylon, Rs.5.25 billion from the People’s Bank and Rs.3.9 billion from the National Savings Bank, a Finance Ministry assessment report on state banks disclosed.

The total tax rate on Sri Lankan banks is expected to be around 70 per cent for the past financial year as a result of the Surcharge Tax and ‘ financial VAT’ increase, a tax expert said.

Financial VAT was also increased by 3 per cent to 18 per cent, reversing a sudden 2019 removal of the Nation Building Tax. “Most banks earn over Rs. 2 billion as taxable income,” he said adding that this will be unbearable to all these banks.

Sri Lanka Insurance Corporation will have to pay Rs.5.5 billion and a sum of Rs.4.5 billion from the Sri Lanka Ports Authority.

These state institutions will have to face severe cash crunch making it difficult to pay bonuses and overtime payments for employees before the April Sinhala and Hindu New year, trade union leaders complained.

Private sector big companies considered as engines of growth will have to borrow money from banks to pay this tax, a senior tax consultant who wished to remain anonymous told the Business Times.

While there was a call for raising taxes, including from the formal private sector to overcome the government’s fiscal difficulties which spilled into the external sector and several others, the Surcharge Tax will push the private sector to more difficulties as they are already high tax payers.