Banks asked to channel VAT, Corporate Tax cut benefits to long-term lending

All commercial banks have been asked to set aside funds saved via the benefit of lower VAT and Corporate Tax under the 2011 Budget to support long-term lending.

The Central Bank has directed all banks to open Investment Fund Accounts to which savings from the lower taxation must be transferred to. The Inland Revenue Department will also send directives to commercial banks today.

Under the Investment Fund Accounts, all banks will be required to extend long-term lending under concessionary rates to the business community, especially the Small and Medium Enterprises (SMEs). The new measure was made public by Treasury Secretary Dr. P.B. Jayasundera yesterday in his remarks at a packed SME Solutions Forum organised by the National Chamber of Commerce (NCCSL).

“Banks have two options. Either pay taxes to the Government or earn income via lending to economic activities of the private sector. We are keen that commercial banks ensure that benefits they will enjoy via tax cuts are not overly channelled to consumption loans such as vehicles or investing in government securities," he said.

The new arrangement will considerably help developing the long-term finance market in Sri Lanka,” Dr. Jayasundera added.

In the 2011 Budget presented by President Mahinda Rajapaksa who is also the Finance Minister, VAT on commercial banks’ turnover was reduced from 20% to 12% a reduction of 8 basis points and corporate tax on profit was reduced to 28% from 37% a reduction of 9 basis points.

$ 50 m World Bank funded programme to help debt-burdened SMEs

TREASURY Secretary Dr. P.B. Jayasundera yesterday revealed that a special initiative with US$ 50 million funding from the World Bank will be launched to support debt-burdened SMEs.

Instead of banks being asked to apply parate executions on operative SMEs, working finance and rescheduling of loans will be made available to SMEs. “The idea here is not to give life to closed or bankrupt enterprises but support those who have struggled and survived the tough times by helping them to restructure their Balance Sheet and boost their business,” emphasised Dr. Jayasundera who is also the Secretary to the Ministry of Economic Development.

The Treasury Secretary also stressed that Sri Lanka is essentially an SME-based economy with all key sectors dominated by them. However whilst extending support, the Government expects the SMEs to link up with the larger sector as well as integrate with the real economy. He said the Government launched the 1 million home economic units to build linkages between them and the SMEs who in turn should partner with the big companies. This positive cycle will bolster rural areas and the country via a robust domestic economy sector and higher exports.