Debt Repayment Levy on banks, financial institutions
Banking and finance transactions have witnessed various taxes from time to time including Stamp duty, Debit tax (operative from 2002 to 2011). In 2011, pursuant to the Presidential Taxation Commission, Debit Tax was abolished interalia as a measure of simplification of the tax system in Sri Lanka. Banks and financial institutions (FI’s) at present attract VAT and NBT applicable on financial services and Crop Insurance Levy in addition to Income Tax, Economic Service Charge and Stamp Duty applicable on specified instruments. The New Finance Act No.35 of 2018 has imposed a new tax termed the “Debt Repayment Levy” (DRL) which is a temporary levy charged on banks and FI’s as indicated in the Budget 2018, as a measure to cushion off heavy debt repayment amounting to Rs 7,000 billion during the next three years as mentioned in Budget 2018.
Hence the tax though effective from the beginning of October 2018 will not be effective post December 2021 as per the legal provisions in the Act itself. At the time of the Budget Speech, the budgeted revenue was Rs 20 billion on the premise that 0.02 per cent is to be collected from all cash transactions effective from April 2018.
It is interesting to see the quantum of collection that the budget proposal as modified would gather to the state coffers during the remaining six months of the financial year and the ability of the FI’s to comply with the tax introduced with one month retrospective effect.
As per the contemplation of the policymakers, the new tax is a direct tax not meant to be passed on to the consumers. Commercial banks, specialised banks and finance companies are expected to shoulder the burden that would impact the effective tax rate of the said institutions (DRL is not applicable on insurance companies and specialized leasing companies registered only under Finance Leasing Act No 56 of 2000 but are not registered under the Banking Act of 1988 or the Finance Business Act of 2011). At the Budget Proposal stage, the Finance Minister did indicate that the DRL will be a tax deductible expense for income tax purposes.
Tracing the history of the new tax
One could trace the history of the new DRL to the Budget proposals read in 2016 and 2017. A Financial Transaction Levy at 0.05 per cent was proposed to be introduced on all ‘cash transactions’ by banks and financial institutions in Budget 2017 but the same was not implemented. The subsequent budget 2018 proposed a Special Levy for Debt Repayment at the rate of 0.02 per cent to be charged on the ‘total transactions’ made through banks with effect from 1st April 2018.
The Finance Act No 35 of 2018 has been certified by the Speaker on November 1, 2018, wherein DRL has been imposed with effect from October 1, 2018.
Due to the prolonged discussions and submissions made by the stakeholders the law couched in the Finance Act 2018 manifests a deviation from the Budget proposal itself. As opposed to the proposal, the Act reflects a 7 per cent tax on the value addition by the institution (calculate as per the VAT Act).
The Budget Proposal 2018 contemplated a transaction tax (directly to be borne by an institution) that warranted significant changes to the software systems and additional compliance burden on FI’s. The plea of the stakeholders was to minimize the inconvenience to their operations.
DRL Compliance requirement
The compliance requirement entails monthly payments on or before the 20th day of the succeeding month, along with the ‘Value Addition Statement’ and filing of an Annual Return (to be prescribed by the CGIR) within six months from the end of the financial year. The first payment for the month of October 2018 falls due on or before November 20. The Tax Office is yet to issue the paying – in –slips and the format of the value addition statement.
In light of the added compliance burden stemming from monthly payments, monthly statements and the annual Tax Return one may wonder whether the prayer for convenience has been granted. This additional burden will not reflect well in the ‘Ease of Paying Taxes’ index which is a sub element of the ‘Ease of Doing Business Index’. The addition of 12 new payments on account of DRL will only hike the present 47 tax payments per year (although reality differs) reflected in the sub index.
Automatic cessation of DRL
A positive feature in drafting the law is that the duration of a 3 year period for the application of the DRL proposed in the budget speech has been expressly embedded in the law. As per the Act, the new tax will cease to operate automatically end December 2021. Unless this specific provision couched under S.36(1) is amended on a future date the DRL would not become a permanent feature in the Sri Lankan tax net unlike the NBT which was introduced by the budget speech of 2009 for a limited period of two years, but continues to be in the tax system even after nine years.
Why not via a single levy?
In the context of the continuous endeavour of simplifying the tax system of Sri Lanka, one cannot resist observing that a similar tax base of a financial institution is being subject to three types of taxes (Financial VAT, Financial NBT and DRL) at three different rates, distinct monthly payments and multiple returns. A prudent analyst would opine that this similar tax base could be a subject matter of a single tax/levy adhering to the cannons of convenience and economy laid down by Adam Smith.