Withholding tax (WHT on interest)
Interest was brought under WHT in order to make it a final tax and to administer collection more efficiently through financial institutions. This was the practice more than a decade and it was very convenient to the depositors as well. Currently the WHT rate on interest is 5 per cent and it is deducted when paying interest to the depositors as a final tax. This is a straightforward and efficient system practised by many governments.
However with the recent tax changes announced, WHT has been removed on interest and brought under income tax based on the highest tax paying bracket. As a result poor pensioners and other depositors who have deposited their hard earned money have to pay income tax on interest earned at the normal income tax rate.
As pensioners who have other income, we are going to be taxed on interest earned depending on the relevant income tax rate and the rate could be even as high as 18 per cent instead of the current 5 per cent depending on the total interest for the year. Further, depositors are now compelled to open income tax files if they earn interest beyond the tax free threshold creating inconvenience and also making it an unnecessary administrative burden for the tax administrators leading to tax leakages.
So we suggest reintroducing WHT as before and making it a final tax even at a slightly higher WHT rate beyond a tax free threshold to make it convenient for tax payers as well as for efficient administration.
Sanjeewa Nishantha
Colombo