Financial Times - Panic buttons over tax

Retired people are complaining that they are being taxed on the only income they get – interest income of over Rs 9,000 per month on deposits while other income earners like most of us get away with tax-free salaries of Rs 25,000.

Credit card holders and the banks have panicked – the first category worried over an extra hole in the household budget while the second worries about losing customers.

Commercial banks are crying like spoilt cats grumbling about the high rate of taxation. They have a point however – that 50-60 percent taxation – can be put into better use by for example the government urging banks to lend to productive areas (and not consumption-based) which would help create jobs and improve communities.

The 200,000-plus migrant workers who leave the country every year are asking – and rightly so – why must we pay an airport tax that goes to develop tourism when their own sector is deprived of crucial government support including subsidies that other sectors like garments, tea and tourism get?

Sri Lankans overseas have literally fallen off their beds over a recent government announcement that dormant or ‘dead’ accounts that have been untouched or not operated for 10 years would be taken over by the Central Bank from commercial banks.

Panic buttons have been struck by Sri Lankans over the dormant account announcement although it is not bad as perceived. The problem however was in the timing of the announcement. When the government is facing a cash crunch and new spending for increased military activity with fighting raging in the northeast becomes an issue, most people having such deposits panicked thinking the government was freezing their accounts to use the money!

The Central Bank and the Sri Lanka Banks Association last week allayed these fears saying that the announcement is in line with banking laws and international practices and to avoid any fraud in operating these accounts by unauthorized persons, and that this money is safe.

The Bank said that claimants would be entitled to all the money in that account after sufficient proof is provided that it is his or her account. According to banking sources, the total amount of money in these ‘dead’ accounts is around Rs 3 billion.

Besides this however, the problem is that all of a sudden everyone is talking about taxes; that’s too high; that it’s too much or too complicated. A complicated and confused tax structure is what many people are grumbling about – when all this while we thought the tax boys were going to make it easier and ensure compliance which is a big problem. The way we see it – this would lead to more tax dodgers not because people want to but because the system just kills your appetite to do what is right.

Take for example the interest income on deposits issue. We have had many letters from readers who are retired and living on interest income from a bank or finance company deposit complaining about how unfair the system is. Here they are taxed for any income over Rs 9,000 per month (can you live on this per month?) while income tax payers get a tax-free limit of Rs 25,000 per month? What is the rational … why the injustice?

In response the government says such depositors have exemptions if their accounts are in state banks or state financial institutions. In a country where the private sector is the engine of growth and is the biggest employer, why the discrimination? The government on this score has got its wires crossed. The state banks are reeking with corruption and political loans (at least that has been reduced to some extent in recent times) compared to ‘cleaner’ private banks.

This is not the end of it all. We are also told that this Rs 9,000 tax limit on interest income on deposits is nothing new and existed even earlier except that banks found it difficult to manage and that now it has been simplified. Thus there is nothing new in this proposal except for some fine-tuning in the way it is enforced. So why has this worried retirees and others who depend solely on this income? Were they evading tax earlier or is the system so confused, complex and complicated that they don’t know what is going on? The general concern in the letters we get points to more confusion and unfairness of a system rather than dodging taxes.

Then take the credit card tax which banks are worried would result in fewer transactions and a drop in new customers. Credit cards are being taxed at Rs 10 for every Rs 1000 spent; which means that even if you spend Rs 50 or Rs 200, you get taxed Rs 10. Card holders are also subject to high rate of interest by the banks for extending credit. In some cases the interest rate is a cool 35 percent a year to the bank – at the rate of 2% or more per month.

A banker the other day said that commercial banks have become tax collectors for the Tax Department. “We are spending our time trying to collect these taxes when we should be doing more productive work,” he said. On the other hand, big business gets away with VAT scams and all kinds of fraud while the small fry is whom the Tax department is going after. Concern in recent weeks over Sri Lanka’s tax structure and systems goes to show that we would never get our act together towards an era where people of this country gladly pay their taxes instead of evading taxes as the case is today. Wait I forget: what about the charge of Rs 2.50 each time the ATM card is used?