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By S.R. Balachandran, Committee Member, Income Tax Payers' Association

Responsibility

It is the duty of our professionals and financial experts to educate the public-at-large for due compliance. First of all, these proposals have to be studied by such persons and representations should be made to the Ministry pertaining to draw-backs and amendments etc. At the same time they have to elucidate the correct position to the public for due compliance. We are blessed with powerful media such as the newspaper, radio and television, with whose co-operation this ambition could be easily achieved. Seminars have to be organised by professional institutions, trade chambers etc. and these should be held in rural areas as well.

In India (State of Tamil Nadu), there is a regulation that at least six seminars have to be organised by each MP in their respective areas after the Budget proposals are announced. We could follow this style and organise minimum one seminar per area.

Let us consider the following aspects.

1. Corporate Tax

(a) Tax Rates

Though the tax rate would be reduced from 35% to 30% with effect from 1.4.2003, 50% of this reduction has to be contributed towards Human Resources Endowment Fund. Therefore the effective Tax rate would be 32.5%. In the past, public companies with more than 300 shareholders (widely distributed Companies) enjoyed concession of 5% Tax credit, which has been withdrawn now. With the contribution of 2.5% towards Human Resources Endowment Fund, their net tax rate would be 32.5%. Therefore, all companies would be now taxed at the uniform rate of 32.5%.

A question arises as to whether this contribution of 2.5% qualifies for Tax deduction. My personal view is that it is an appropriation of profit after tax. However, it may be considered a qualifying payment to claim tax benefits if approved by the Ministry.

(b) Venture Capital Companies

These companies will enjoy a reduced income tax rate of 20% effective 1.4.2003. Five year tax holiday would be given to new Venture Capital companies operating after 1.4.2003, if at least 80% of the funds have been invested in specified areas as determined by the Ministry. Balance funds may be invested in global activities by a local company who has foreign subsidiaries or branches. By this concession active support has been assured for financing new projects which are essential for our country.

(c) Qualifying Payment Relief

Qualifying payment allowance will be granted with effect from 1.4.2003 up to 50% of the investment in new Venture Capital Companies, subject to a maximum of 1/5 of assessable income, where the investment per year per person is not less than Rs. 500,000.

(d) Dividends

With effect from 1.4.2002, Dividends are taxed @ 10%. We have clearly stated about this anomaly to limited companies as in the past, dividends received by limited companies were tax free. This position has to be rectified. Regrettably, according to this budget proposals, effective 1.4.2003, even exempt dividends would be taxed at 10%.

Taxable dividend received by a resident company from outside Sri Lanka will be taxed @ 10% instead of 35%.

(e) Separate Accounts

Companies could have two or more activities which are taxed at different rates. For eg. a company which imports and distributes could have a branch, says an approved tourist Hotel. The tax rates would be 30% and 15% for import and distribution and tourism respectively. Separate accounts have to be maintained to ensure this concession.

This step is to prevent manipulation of tax claim. For eg: the company (engaged in import and distribution) could purchase a machinery for the Hotel and claim 50% depreciation allowance in common, which results in tax saving @ 30% instead of 15%.

Losses incurred in one activity cannot be set-off against the profit earned by the other activity.

(2) Personal Taxation

(a) Tax Free Allowance

In the last Budget speech on 22.3.2002, tax allowance was raised from Rs. 144,000 to Rs. 240,000 per annum. The appropriate rates were 10%, 20% and 35%. Now 35% has been reduced to 30%. Therefore, if the assessable income after qualifying payments, exceeds Rs. 600,000, 5% tax deduction on the excess could be enjoyed.

(b) Qualifying Payments

In the past, qualifying payments were:

I. Rs. 25,000 (maximum) for EPF contribution etc.
ii. Rs. 25,000 (maximum) for Insurance premium etc.

Now we could enjoy additional qualifying payment for investments in venture capital companies if the investment is more than Rs. 500,000 per annum. (we could claim either 50% of the investment or 1/3 of the assessable income, whichever is lower).

(3) Withholding Tax on interest

With effect from 1.4.2002, 10% WHT was imposed on interest. Interest income amounting to Rs. 6,000 per month or Rs. 72,000 per year per deposit qualified for exemption. Now this limit has been increased to Rs. 108,000 (Charitable Institutions - Rs. 144,000)

According to my point of view there is no additional benefit to the pubic-at-large.

In the past, you could split the deposits so that you could enjoy tax exemption up to Rs. 240,000 per year. excess would be taxed @ 10%.

The same facility is available even now. There is no extra benefit to the individual.

(4) Bank Debit Tax

This was introduced @ 0.1% effective 1.6.2002. Since current account maintained with any commercial bank was liable for this tax, some people opened savings accounts to enjoy tax exemption. With effect from 1.1.2003 current accounts, savings accounts etc. (excluding NRFC Accounts) will be liable for bank debit tax.

It should be noted that the facility granted to open Special accounts for payments to the Director General of Customs, Commissioner General of Inland Revenue etc., and current account transactions pertaining to bank to bank transfers, debit tax change etc. still continues. The continuation of this concession is very important to us.

(5) VAT

VAT was introduced effective 1.8.2002 and GST and NSL were withdrawn. This has simplified the tax payments. The following changes have been announced now:

(a) Wholesale and Retail Sector

In the past wholesale and retail turnover were not liable for VAT unless voluntarily registered. However, effective 1.7.2003, wholesale and retail turnover also would become liable for VAT. The threshold limit would be Rs. 500,000 per quarter or Rs. 1.8 million per annum.

According to my opinion this step has several drawbacks:

i. This program will increase the no. of VAT files by approx. 5,000 Already the Department of Inland Revenue is unable to exercise full control over its operations and administrate tax collection efficiently.

Therefore, these additional 5,000 files will create heavy burden resulting in tax evasion.

ii. Price will go up as VAT has to be paid on the full selling price. In addition, 1% Turnover Tax payable to provincial councils may continue. It should be noted that this 1% Turnover Tax is payable on selling price including VAT recovery which will be remitted to the Dept. of Inland Revenue in full.

iii. It will be troublesome for traders, especially retailers to invoice each and every transaction. For eg: even for the sale of a cigarette, an invoice has to be raised. Documentation will become enormous.

iv. To claim input credit, the documents to be submitted would be numerous. The trader has to maintain all the documents for satisfactory input credit claim. With the limited space and resources available to him, this will create additional problems and result in non compliance.

I hope the Ministry analyses these suggestions and grants exemption.

(b) Travelling Vehicles

In the past, purchase of vehicles for travelling did not qualify for VAT input credit. I am happy to note this anomaly has been partially removed and 50% input tax credit would be allowed.

It should be noted that only a percentage of taxable activity would be considered. For eg: if the company has 90% taxable activity and the balance 10% is non taxable (buying and selling), only 90% of the 50% of VAT paid on the car would be permitted as input credit claim.

(c) Withdrawal of exemption

Exemption granted for some activities will be withdrawn effective 1.1.2003. It is unfortunate that this decision has been made within 5 months of implementation.

One important fact we are concerned about is the import and supply of medical and dental equipment, surgical dressings etc. which would be liable for 10% VAT. This will be an additional burden on the public. I hope the Minister will consider this and continue granting exemption for these items.

(d) Bank and Financial Organisations

Bank and Financial Organisations would be subject to VAT @ 10% on: their total of net profit and expenditure on employees' remuneration including benefits.

It should be noted that this tax cannot be passed down through the system. i.e. recovery from the customers is not permitted.

No input credit would be permitted. This is actually an additional tax imposed on Bank and Financial Organisations. I hope representations would be made by them accordingly.

(6) Foreign Remittance

It has been announced that foreign exchange remitted by an individual, which represents net earnings abroad, to a bank in Sri Lanka would be taxed @ 15%.

However, the Ministry has clarified that migrant workers registered with the Sri Lanka Foreign Employment Bureau will continue to enjoy the tax exemption. This tax is applicable for those who reside abroad for less than 365 days and earn foreign exchange by doing casual jobs. In the past such remittances have been taxed at 35% (maximum). Since there is a reduction now and the concessionary rate of 15% has been imposed, we welcome this decision.

(7) Foreign Exchange on Import

Documents

In the past, when documents are accepted by a Bank in Sri Lanka under L/C opened or on collection basis (DA or DP terms) exchange should be purchased from only that particular Bank. Now there is a facility to purchase foreign currency from another bank (not linked to the original Bank).

This facility ensure foreign currency is made available at competitive rates.

(8) Imports without Foreign Exchange

In the Past, trade samples, advertising material etc. could be imported under "No Charge" invoices without involving any foreign exchange transaction, to the limit of US$ 1,000.

If the value exceeded US$ 1,000 approval from the Exchange Control Dept. was necessary. Now, such imports even exceeding US$ 1,000 are permitted at the discretion of the Customs Dept. without seeking approval from the Dept. of Exchange Control.

(9) Credit Rating

The following institutions will be required to obtain a credit rating by the specified dates:

This is a commendable act by the Government. when funds are collected from the public, it must be ensured that they are handled by institutions of high reputation.

The public will be aware that their funds are kept in trustworthy companies. Mushroom companies will be out of the market.

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