Wednesday, 27 November 2013 00:39
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Treasury dismisses impact on intermediate cost or hike in borrowing rates
The computation of the 2% Nation Building Tax (NTB) on the financial services sector will be on the Value Added Tax (VAT) base and not on turnover or income.
This was disclosed by Treasury Secretary Dr. P.B. Jayasundera on Monday at the Daily FT-Colombo University MBA Alumni Association Forum on the 2014 Budget as well as yesterday by Deputy Secretary to the Treasury S.R. Attygalle at the Sri Lanka Forex Association-Thomson Reuters organised 2014 Budget Forum.
Both Treasury officials dismissed the 2% NBT having an impact on intermediate cost or leading to a hike in charges or interest rates by banks and financial institutions.
“We will use the VAT base for computation of 2% NBT.
The basis for VAT is after income and expenditure excluding wages and profits. If it was computed on income or turnover then the argument that the 2% NBT can have an impact on intermediate cost is valid. This is not the case,” Attygalle added.
He said that combined turnover of the financial sector was over Rs. 150 billion and 2% would be colossal. However, the 2014 Budget move aims at raising only Rs. 3.6 billion via 2% of NBT. Attygalle also said application of NBT was correcting an existing anomaly as financial services wasn’t included previously.
The Treasury’s Deputy Secretary also said that banking sector has had a lot of space in recent years with lower effective taxation and the new 2% NBT is manageable. Via the National Budget a few years ago, income tax on banks was reduced to 28% from 38% and VAT was reduced to 12% from 20%.
Net interest income of banking sector in 2012 was Rs. 196.7 billion whilst profit before tax (after VAT) was Rs. 116.3 billion. After tax profit was Rs. 82.3 billion.
In terms of Section 6 of the Banking Act No. 30 of 1988, a licensed commercial bank is prohibited from carrying on any activity other than the banking activity which is listed under Schedule II of the Banking Act, including locker rent and other banking related service income.
Due to this reason the banking activity was not liable to NBT though some banks were paying NBT on non-finance income. The 2014 Budget proposal is to address this anomaly in the application of the law.
