Banks urge exemption from ‘high’ dividend proposal

The Sri Lanka Banks’ Association (SLBA) has voiced concern over the budget proposal on dividend payments saying it would restrict capital growth and impede expansion, among other issues and wants to be exempt from the proposed rule.

Under the budget’s Deemed Dividend Tax proposal, any company with a dividend payment of less than 1/3rd of its distributable profits shall be subject to income tax of 15% of the difference between such 1/3rd and the amount of dividend distributed.

Copies of SLBA’s letters of appeal to the Treasury Secretary and the Central Bank Governor on this and other budget proposals were released to the media this week.

The SLBA, which represents all commercial banks, said the dividend proposal would also curtail development and implementation of IT, which banks will need “to introduce to meet the demands of agency functions passed on to banks by the Department of Inland Revenue for recovery of taxes to conform to compliance requirement of Anti-Money Laundering Laws and various other regulatory obligations.”

It said dividend payments in banks “we believe should be a decision for the management of each institution after taking into account the level of reinvestment required to maintain stability and growth aspiration of the organization. This is of particular importance in the case of banks where capital adequacy is crucial from a regulatory and a business point of view.”

The SLBA said a heavy payment during an unusually good year, due to say, windfall profits, will not only be a distortion, but will result in inadequate funds being available for capital formation. Banks have to ensure growth in shareholder funds to match expansion of risk weighted assets. On other matters, the SLBA also referred to the proposed restriction of the deduction of specific provisions for bad debts to 1% of outstanding loan amounts.

This proposal, it said, appears to be counter-productive, since such restriction would discourage prudent banks from making excessive provisioning as is done now. The Central Bank’s requirement of 1% general provisioning runs counter to the budget proposal since it envisages a higher provision requirement. “The SLBA also would wish to point out that banks are unable to write off specific provisions for a long duration due to law’s delays and the resulting funding cost, which is borne by the bank, were partially mitigated by the tax considerations. The new proposal seems to do away with this relief,” it said. It asked that the restriction being increased to 1.5 % from 1%; and to include the newly introduced provision of 1% of performing advances as an allowable expense.