28th May 2000
Front Page
Editorial/Opinion| Plus| Business
Sports| Sports Plus| Mirror Magazine
The Sunday Times on the Web
Contents Index Page
Front Page
Sports Plus
Mirrror Magazine

'Take the tension out of pension'

Sri Lanka's tax treatment of Pensions, Provident Funds and life insurance is inconsistent with international best practice, a recent World Bank report has highlighted. 

It was recomended that retirement savings be taxed only at one point. The need to amend tax treatment of retirement savings instruments was highlighted in the report.

The report on superannuation benefits in Sri Lanka, suggests the objective of promoting savings for old age by making pensions a more attractive financial market instrument could be met inter alia by amending tax treatment of retirement saving instruments. The international best practice suggests it is preferable to tax income deferred for retirement once-either at the time of initial contribution to a pension plan or at the time the income is received in retirement. Thus investment income of accumulated funds are not taxed.

The Provident Fund and Employees Trust Fund (EPF, ETF) are taxed twice-at the point when it is accumulated and when it is distributed, in the case of employers' contribution and at the point of initial contribution and as a part of the accumulated fund in the case of employees' contribution. 

Civil service pensions are completely exempt.

However the report says in countries like Sri Lanka it is regarded as preferable to tax all income up front so that contributions to retirement savings would be out of taxed income but would never be taxed again.

In Sri Lanka only 200,000 people pay income tax directly, so initiatives to rely upon tax incentives are unlikely to have material impact upon the reach of retirement savings programs, the report concludes. 

Conversely the fact that non tax payers become tax payers through tax on their contributions to the EPF, ETF and life insurance schemes is an unusual disincentive to provide for retirement.

"It is even more of a paradox that investment in government securities are tax exempt but individuals investment in EPF which is almost entirely invested in government bonds is taxed at 10 per cent," the report says.

Lift the curbs on fixed incomes

In the midst of uncertain economic environment and sluggish capital market activities, the fund management industry is requesting the curbs placed on fixed income funds to be lifted.

At present, fixed income funds invest a maximum of 20 percent in unquoted debt like commercial paper and the rest in gilt/quoted debt securities. The fund management industry is requesting the Securities and Exchange Commission (SEC) to lift restrictions on investing in commercial paper.

A Commercial Paper is a short-term (three or six months) money market instrument issued by non-financial and financial institutions. The interest rates are usually more attractive than fixed income securities.

The request - if granted - will be a boost to Eagle Income Fund and Namal Income Fund.

With the equity market faring poorly, the industry would like to have more funds invested in commercial paper, industry officials said.

SEC' s Senior Legal Manager, Kithsiri Gunawardene said that the Commission would make a decision in the coming weeks.

Fund management companies recently changed their accounting polices, to enable them to pay dividends from their variable capital accounts, industry officials said.

The income and expenditure account, which is currently prepared by unit trust, is being replaced with a statement of total returns.

This statement will elaborate on realised and unrealised gains and losses in addition to dividend and interest income.

The present accounting legislation specifies that dividends can only be paid to unit holders out of realised gains.

Interest income, dividend income and realised capital gains provide the basis for a payment of dividends. If capital losses were realised, it would erode the funds available to be paid out as dividends.

Balanced equity funds, which have made a commitment to pay dividends and increased capital gains for unit holders, would be prevented from paying dividends, if a capital loss is realised.

The present status encourages unit trusts to hold on to depreciating equities, as a sale would result in a capital loss, which stifle dividend payments, unit trust officials said. 

"Unit trust should not be allowed to decide which equities to sell based on an impending decision to pay dividends," analysts said.

This recent development brings local regulations on par with global standards. 

The Investment Management Regulatory Organisation (IMRO) of UK (an organisation similar to the Unit Trust Association of Sri Lanka) have issued similar guidelines which have obtained the approval of the UK Accounting Standards Board, unit trust officials said.

"Although it is contrary to accounting norms to pay dividends at the cost of eroding capital, unit trusts are variable capital institutions and should be viewed in this light," analysts said.

The change would also increase transparency, as the total returns statement will depict all the results from operations.

Who is behind buying spree?

A flurry of buying in some quoted banks in the recent weeks, have caught the market regulators' attention.

The Sunday Times Business learns that the Colombo Stock Exchange may also look into the issue to see whether the new buyers have triggered the take-overs and mergers code.' Quoted companies are required to disclose if a new/existing shareholder acquires more than 30% of the company.

Central Bank's Banking Supervision Department is also making its own inquiries, a senior Central Bank official said.

Section 46 (1)(d) of the Banking Act permits single shareholder to own up to 15 percent, a company and its related companies 20 percent, and the bank's promoter to hold a maximum 25 percent of the equity.

Though some business groups seem to have effective control of some banks, analysts say the Central Bank has not been able to effectively enforce existing regulations in some cases.

In 1997, the Monetary Board allowed DFCC to purchase a stake in excess of the specified limit in Commercial Bank of Ceylon.

The National Mercantile Bank, which commenced operations last week, was not issued a banking licence by the Central Bank earlier because it was not satisfied with NMB's ownership structure.

The recent events have put the market regulators in a tight spot to prove the authencity of the new ownership, banking analysts observe.

Central Bank too is keen to enforce the Banking Act to ensure no single/majority shareholder violates the single borrowing limit. Central Bank recently relaxed the rules of banking ownership with foreign shareholders permitted to own up to a 60% stake. India on the other hand, has no restriction on bank's ownership. 

However, Sri Lanka's banking regulations are rather stringent and are on par with Asian and World standards. The present single ownership limit prevents large-scale consolidation, say banking analysts. Most local bank's are closely held by business groups and not by broad based institutions.

Mind Your Business

Promises are forever
Remember that budget promise to 'consider' a wage increase for public servants, that was supposed to be forwarded to a commission? 

Now with a 'war-footing' and being asked to donate two days' wages for the welfare of the security forces, Treasury officials were in a quandary as to whether they should proceed with their work for the wage hike proposal.

They made inquiries and the surprising answer was 'yes'. Find some way to give them something, they have been told, because whatever happens to the war, elections have to be held anyway.

Need a boost
The statistics show that tourist arrivals are increasing. But the millennium year will be a pretty tough one for the hospitality industry because of the adverse publicity the paradise island has received in recent times. 

Major hotel managers met recently to take stock of the situation and consider slashing room rates to try and increase occupancy. 

Even though there was no overall consensus, a decision was taken to allow hotels to reduce rates only for locals, in the form of special packages.

If that too does not help to boost income, reducing room rates for tourists will be considered, they say…

On hold
A major state bank was considering introducing on-line banking in keeping with the times, especially since some private sector banks already have the facility. 

Surveys were done to assess the feasibility of the project, because the initial investment was thought to be high. 

The results were disappointing. Fewer than five per cent of account holders would use the facility mostly because computer usage was still at a low level in Sri Lanka, the surveys revealed. 

So, the project has been put on hold- at least for the time being…

Economist says government should be a regulator, not a provider

Government in developing capital markets should move out of providing financial services to that of the regulator, if markets are to develop quickly and efficiently, a senior economist said last week.

Immediate priority should be to put in place and a supervisory and regulatory base at the center of the financial system. 

This supervisory and regulatory core should foster market development but allow private initiative and innovation to take the lead. It should seek only to deal with problems related to asymmetric information and moral hazard, through disclosure and direct surveillance. 

There must also be adequate legislation - such as framework for speedy contract enforcement, debt recovery, and bankruptcy - to support the financial system, the International Monetary Fund (IMF) Senior Resident Representative, Dr. Nadeem Ul Haq said addressing a Central Bank seminar on the development of financial markets in developing economies. 

"Financial regulators must take on the role of referees and they must let the markets perform," he said. "First let the markets develop and then bring in regulation. Governments should steer the market to create an atmosphere of transparancy and investor confidence."

The importance of developing markets helps in the achievement of many objectives. 

In addition, market and instrument developments tends to be complementary. For instance, stock market development, may be an important means for introducing transparency into the privatisation process. 

Capital market based privatisation can, in turn, also enhance the deepening of existing stock exchanges.

The regulatory and supervisory agencies must be independent professional agencies responsible for the soundness of the financial system. 

Research has shown that the Central Bank's independence is very important for the effective conduct of monetary policy and the sound supervision of the banking system, he said. 

While developing the regulatory core, vigorous efforts will have to be made for privatisation of government interests in banking and security markets. 

The policy of financial repression where high liquidity ratios for banks provide a captive market for government paper will have to be discounted. The private sector will also have to be given room to develop financial services with the diminishing role of the government, he added.

New burdens need new responses

The "Focus on the Economy" for this month discusses in detail the impending economic crisis. 

The main underlying factor is the intensified war. The most obvious impact is the concomitant escalation of costs. Most of those costs are in huge foreign expenditures for sophisticated weapons and other instruments of combat.

The government has no option but to incur these costs at this critical juncture of the war. 

Apart from this added expenditure in foreign exchange, which would have an adverse impact on the balance of payments, there are other indirect consequences on the budgetary out-turn as well as the balance of payments. These are explained in greater detail in our column "Focus on the Economy". 

The Budget for 2000 expected a huge slice of financing from the proceeds of privatisation. 

As much as Rs 30 billion was to be realised from privatisation proceeds.

A large proportion of these proceeds would have been in foreign exchange, which would have in turn strengthened our balance of payments and foreign exchange reserves. But with the current war situation it would not be prudent to put these shares for sale among international investors. The postponement of this sale would weaken our public finances. 

The budget deficit would be increased. Not only will it be a burden on living conditions, but also be a disincentive to production.

And that is what we must stop at all costs. In fact we must use the crisis to inspire our people to higher levels of productivity.

It is vital that individuals as well as corporates do take action which would not be detrimental to the stability and growth of the economy.


More Business

Return to Business Contents


Business Archives

Front Page| News/Comment| Editorial/Opinion| Plus| Business| Sports| Sports Plus| Mirror Magazine

Please send your comments and suggestions on this web site to 

The Sunday Times or to Information Laboratories (Pvt.) Ltd.

Presented on the World Wide Web by Infomation Laboratories (Pvt.) Ltd.
Hosted By LAcNet