The interest on savings made by Sri Lankans have been made liable for a higher withholding tax by the new Inland Revenue Act, which was passed in parliament last week, a business forum in Colombo was told yesterday.
Accordingly, the government will deduct 5.0 percent of the interest received from all savings by Sri Lankans, barring senior citizens, but that is also up to a certain level when the interest is given to the deposit holder at maturity. Currently the government keeps 2.5 percent of the interest of individual depositors as withholding tax, a change from the previous practice of step-up rate applicable on depositors based on their annual income from deposit interest. However, the interest received by a senior citizen up to Rs.1.5 million per annum has been exempted from the withholding tax,
said Nishthar Sulaiman, Partner, Ernest & Young at a seminar on the new Inland Revenue Act held at the National Chamber of Commerce, yesterday.
Under the new Inland Revenue Act, withholding tax applicable on deposit interest has been so extensive that it even covers the deposits placed by clubs and associations, charitable institutions and companies other than financial institutions.
Therefore under the new Act, even a deposit of a death-donation society in a village will become liable for withholding tax.
However, charitable organizations established for the purpose of care of children, elderly or disabled have been exempted from the tax, a paper presented by Ernest & Young at the seminar noted.
The tax experts remain sceptical of smooth implementation of the new law, but the Finance Ministry representative showed readiness to amend any areas of the law—not just limited to the withholding tax— which could disrupt the economic well being of the public.
The new tax law was built on the sole premise of trimming the country’s fiscal deficit, which was ailing the Lankan economy for decades, by closing the revenue leakages in the current law and building new revenue sources wherever possible.
Meanwhile, much to the surprise of many, the new law has also made the foreign currency deposits maintained by corporates liable for the same withholding tax of 5.0 percent.
As a result, the non-resident foreign currency accounts and deposits maintained at foreign currency banking units by corporates will become liable for the higher tax from April next year. However, it is uncertain whether the NRFC accounts maintained by individuals are also liable for the tax. NRFC accounts are currently exempted from the tax as an incentive towards bringing in foreign currency earnings to Sri Lankan without keeping them abroad.
This might also have some concerns for banks in building their foreign currency liability books.
Some believe that the government may have to do a lot of tinkering to the new tax law at the forthcoming budget.