Tax on interest income from 2017 budget
Confusion and concern surround a tax that is being enforced from April 1 on all interest-earning deposits that also applies to foreign remittances, a tax which is overdue by almost a year in its implementation.
The 5 per cent tax cut on interest income of savings accounts in banks and other financial institutions as withholding tax (WHT ) will come into effect from April 1, (April’s Fools Day), according to a circular issued by the Inland Revenue Department (IRD) to all banks and financial institutions last week.
The confusion arose since this was not a proposal in last year’s budget but one made in the 2017 budget presented to parliament by then Finance Minister Ravi Karunanayake in November 2016 ahead of the enactment of IRD bill which was devised with the assistance of the IMF.
The 5 per cent WHT on interest income is being enforced for the first time on foreign remittances which applies to export earnings and remittances of Sri Lankan migrant workers, several bank officials said.
The proposal which was scheduled to be implemented under the IRD Act had been delayed as it was challenged at the Supreme Court in July 2017.
The Supreme Court (SC) had shot down the bill after hearing the 10 special determination petitions challenging it for the violation of the constitution.
The government had earlier planned to charge the 5 per cent withholding tax under the new Inland Revenue Act from October 1, 2017. But the Treasury had to delay it due to the SC directive to amend certain clauses of the bill, a senior official of the Finance Ministry said.
The Finance Ministry has now decided to implement all the provisions of the new tax law from April 1 owing to difficulties in maintaining two types of accounts in a single financial year, he revealed.
Several depositors expressed their dismay to the Business Times when they received letters this week from some banks and financial institutions indicating that the WHT deduction will be increased to 5 per cent from 2.5 per cent on an IRD directive.
The WHT exemption on savings account with less than Rs. 60,000 interest per annum will be removed. WHT will be re-introduced on specified fees where the payment exceeds Rs. 50,000 per month.
In the case of senior citizens the 5 per cent interest income deduction under WHT will be made above an aggregated annual interest income of Rs.1.5 million from savings deposits.
The withholding tax increase is expected to raise additional revenue of Rs.26 billion to the state coffers which is saddled with heavy debt service payments including interest amounting to US$ 2.9 billion this year.
Savings deposits of charitable institutions and companies other than financial institutions, clubs and associations as well as death-donation societies in villages are liable to 5 per cent WHT.
However, charitable organisations established for the purpose of the care of children, elderly or disabled have been exempted from the tax.