News
Govt. loses billions in tax revenue from interest
Government revenue from tax on interest income has fallen dramatically–from Rs 30bn in 2019 to just Rs 2bn in 2020–with one of the main reasons being a change in collection format which requires taxes to be filed rather than collected at source.
The Inland Revenue Department, which provided the statistics, said the drop was due to “policy changes” but refused to elaborate. The new format was introduced in 2020 and particularly inconveniences older people, many of whom have closed their tax files.
The Government introduced a withholding tax on interest income in 2012, a once-and-for-all payment that is deducted at source. Anyone who earned more than Rs 125,000 in interest was charged five percent of that income as tax.
“Up to 2019, the banks deducted five percent of our interest income as withholding tax, remitted it to the Government and paid us the remaining 95 percent,” said a 73-year-old retiree who reached out to the Sunday Times. “We did not need to maintain a tax file or pay any other fees.”
But in 2020, the Finance Ministry introduced a stimulus package that brought in a range of value-added and income taxes. Withholding taxes were removed or replaced. The levy on bank interest income was now called an “advanced income tax”, payable by all those who earned interest up to Rs 250,000 a month (anyone above that is subject to normal income tax).
“That is another problem,” said the retiree who, along with his wife, had sold their ancestral home and were living off the interest on sale proceeds. “As a retired senior citizen, I have no other sources of income.”
The new rules also require citizens to open income tax files. This necessitates the annual submission of voluminous documents. “We have to go through pages of information at our age,” he said, adding that the payments must now be made every quarter. “I am recovering from brain surgery.” This inconvenience alone was a significant burden on a segment of the population that finds mobility difficult, not least owing to poor health.
The elderly bank customers, in particular, urge the Government to simplify the procedure because even hiring someone to carry out the task could be risky for various reasons.
“Tax consultancy is quite expensive but also inevitable at this rate,” said Rajan Asirwathan, well-known accountancy professional and former Senior Partner and head of KPMG. The withholding tax was initially introduced to reduce tax evasion as relevant financial institutions would deduct the requisite fees and remit these to the Inland Revenue Department.
“The sudden policy to make people pay the taxes on their own resulted in evasion due to two issues–tax illiteracy and inconvenience,” he said. “Opening an income tax file and paying quarterly is a cumbersome process; so citizens are discouraged from paying. The withholding tax, on the other hand, was convenient, so I don’t quite understand why they changed it.”
The former system was even more convenient to the IRD, Mr Asirwatham said. Under the new procedure, millions more files will have to be maintained as income tax.
But Inland Revenue Commissioner General W C Bandara said there was a more convenient way to pay tax in interest income. Tax-payers who earn more than Rs. 3mn annually in interest income can discuss it with their banks and grant consent for deductions to be made and remitted to the IRD on a monthly basis.
“This system has existed since the beginning and we issued multiple notices when the policy changed,” he insisted. The alternative is to file and pay the 6-8% tax directly to the IRD, quarterly.