The private sector and analysts over the weekend emphasised imposing a surcharge on income tax was more rational than on a specific profit threshold as Budget 2022 has been proposed.

In a bid to raise Rs. 100 billion, Finance Minister Basil Rajapaksa mooted a retrospective one-time tax surcharge of 25% on persons and companies with a taxable income over Rs. 2 billion for FY21.

He said around 65 companies would come under the proposal, which is the second-largest (30%) new revenue measure in the 2022 Budget.

However, private sector and analysts pointed out that a surcharge on tax across the board would have been more rational than targeting a specific profit threshold. Such a move would also ensure that a certain category of companies is not targeted whilst the rate, too, would be lower.

Ernst & Young said since the tax base is not clearly mentioned, the question is whether the new tax would apply to all forms of profits and income, especially those who are exempt from tax, such as the IT sector or those paying a lower rate of tax, such as exporters.

It also said the marginal relief is generally granted where the criteria to qualify is equal or very close to the qualifying threshold and is expected that such relief would be given.

“In large groups, it is likely that an operations company would exceed Rs. 2 billion in taxable income, which would be distributed as a dividend to the holding company, which is also likely to have taxable income exceeding Rs. 2 billion. Would such a double count be excluded?” E&Y added.

However, it questioned whether this tax surcharge would be deductible from the following year’s income taxes.

KPMG said a surcharge on Income Tax has been imposed from time to time in Sri Lanka since 1961. Surcharge on Income Tax imposed ranges from 10% to 20%. However, it added the 2022 budget proposal does not indicate the base on which surcharge tax is to be imposed.

Capital Trust said the Surcharge Tax will be 25% of the Taxable Income and not 25% of the tax liability. “Tax surcharge is on Taxable income which is only in Sri Lanka as tax has already been paid for in those respective countries for foreign sourced income,” it said, adding investors to not to get misled by looking at the total amount of the tax paid in the Profit and Loss account.

NDB Securities estimates the overall impact of this revenue proposal to be Rs. 56-60 billion on listed companies.

“We believe this comes as an adjustment to the opening reserve balance (thus impacting the book value),” it said. “Most of the heavyweight high dividend yield stocks come within this bracket (banks, tobacco), and we believe a reduction in the payout in the current financial year is a likely scenario,” NDB Securities added.

Most compared the surcharge tax similar to the Super Gains Tax in 2015, which discredited the Yahapalanaya regime among the corporates. In 2015, a Super Gain Tax was imposed at the rate of 25% on taxable income of an individual or a company for the Year of Assessment 2013/2014, where the profits as an individual entity or as a group exceeded Rs. 2 billion. The move raised Rs. 50 billion.

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