Bankers' fear that deemed dividend tax may hurt capital of Sri Lankan banks

Fri, 24 May 2013 04:54:21

21 Nov, 2006 15:58:04

Nov 21 (LBO) - A controversial tax to force Sri Lankan companies to pay dividends would undermine the health of the commercial banks by depleting their capital, a top banker has warned.

The budget proposed that companies that pay less than 25 percent of their distributable profits as dividends should be subjected to a penal tax.

"We in the banks are given a minimum capital requirement; we have to have capital adequacy to support our assets," Rienzie Wijetilleke, Chairman of Hatton National Bank told a seminar of the Sri Lanka Association of Economists.

"We have got to provide something for our future. My banks' requirement in the next five years for technology alone is 10 million dollars. Where would I get the money if I had to give all my profits to the share holders?"

Due to loose monetary policy, Sri Lanka's banks have been lending heavily and most banks need capital.

Banks are already heavily taxed through income tax, a financial value added tax and a debit tax.

A top tax expert speaking at a Ceylon Chamber of Commerce post-budget seminar said the tax may not have the intended effect because companies may choose to retain cash by paying extra tax.

"I don't think the proposal has captured what people have been lobbying for," N R Gajendran, of Gajma and Company said.

"Companies can choose to just pay the 15 percent and be done with it. So you don't distribute, only thing is you pay 5 percent more because normally if you distributed dividends you would have paid 10 percent."

Lal de Mel, former Head of CIC said the tax could push up share values, because companies that pay high dividends tended to have high price earnings valuations, according to his calculations.

"Price earning ratios that is not the only criteria for the shares," Wijetilleke said. "People get a lot of other gains on shares. The man who bought the HNB shares in 1976 for 1000 rupees, now it is worth 3 million."

Analysts say companies that grow fast and are more profitable tend to have high earnings multiples.

Since they are profitable they naturally pay a higher level of dividends.

Analysts point out that higher profitability is the reason for the higher valuation rather than the fact that they paid dividends.

Berkshire Hathaway, the investment firm of Warren Buffet, has not paid dividends for years.

Other business leaders say the tax would hurt cash flows as most companies have problems in finding cash to pay dividends, even though accounting profits are made.

Already exporters were facing cash-flow problems because value added tax refunds was apparently delayed because the government was short of cash.

"When there is a compulsory distribution of 25 percent definitely it will be a real difficult task because the liquidity is with the government, because vat refunds are delayed. In spite of that, if we have been asked to distribute the profits, we can distribute the profits but not in cash but in kind."

Analysts say companies could look at paying stock dividends, which done by giving a redeemable debt instrument, which some companies have done in Sri Lanka in the past.

But companies say it is important to save money for capital formation rather than give it for consumption, especially if companies need capital.

"We have to compete with the global market," says Rajapakse.

"If we are told to distribute the profits to the shareholders, the capital formation will not take place in the first instance."

The government is keen to push dividends in order to charge the dividend tax.

But private sector officials point out that choice of paying dividends is an internal matter.

"It is an infringement of the rights of the companies to compel companies to pay so much of dividends," says Wijetilleke.

"The Board of Director should be allowed to decide how much to pay and how much to keep."

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READER COMMENT(S)

10. Nicole Phillips Nov 27

Sena you round off a nice post with a very pertinent question.. where is the tax payer money going ?

I think i can answer some of that from my observations when going down the streets of Colombo...

Huge billboards and posters of MR at every corner

Astronomical increases in MP's presidents speakers etc etc salaries with arrears...

multi million rupee super luxury vehicles for our MP's....

inefficient corrupt bankrupt government organisations

etc etc.. the list is endless... sad sad situation...

I think MR hopes to get the additional tax revenue of companies who don't wish to pay dividends and doesn't really give a damn about the dividend payout.

9. Sena Nov 27

The dividend or tax rule is silly.

You can't say "poor shareholders" because dividend paying equity is not the only security thats available. FDs, commercial paper and preference shares are available for individual investment.

Naturally, if a company historically pays good dividends, there will be a greater demand for that share and it would be reflected in its price.

If an investor feels that he's not geting the return he wants from a company, then its his right to sell the stock and put his money somewhere with more returns.

Forcing this is like guaranteeing tax revenue.

The company either has to pay corporate tax on its profits, or the individual pays capital gains tax from the dividend and the balance then gets taxed either on re-investment, spending in the form of consumption tax, or by putting it in the bank in the form of debit tax.

So the government is effectively increasing its tax base, trying to get reserves into circulation.

This is very short-sighted as it discourages growth, innovation and expansion of the financial sector.

And the recent trend has been to provide rural areas with more advanced banking facilities and instruments.

The drawbacks to the industry from this move (which in turn will affect the consumer negatively) far outweigh the benefits to the the relatively small number of individuals who stand to gain from greater dividend payments.

Also, the government should not interfere in private business operations in this way, its not their place.

They can barely run their own administrations efficiently, its highly un-necessary and inefficient to tell private corporations, who run effectively, effeciently and MAKES MONEY (ooooops...sorry CEB) how to run their business.

Instead of forcing companies to pay dividends, why doesnt the government lead by example and give something back to those higher-income tax payers to float poor policy?

How about fixing up the roads in colombo so they dont flood, how about fixing the potholes or disposing or garbage or making sure drains dont get blocked? Where's this taxpayer money being spent?

8. Lankan Nov 22

If big shareholders want to keep money in banks as capital it is a commendable move and the best thing for depositors. Banks are highly leveraged (about 10 times).

If the Board, which represents major shareholders are willing to put more of their funds to back depositors money, we should applaud them.

They are the custodians of poor people's money. See what happened at Pramuka. The shareholders capital was eroded, and there is no money to pay depositors.

Hundreds of thousands of depostors money is at stake. It is not just small shareholders that we have to consider.

Of course in companies other than banks, which are lightly leveraged the situation is different

7. exmac Nov 22

I agree with Peter, overall it's a good move 4 the minority/small shareholders. There r valid "cons" 2. But the "pros" out weigh the "cons" In a market like ours which is dominated by the select few, this kind of compulsory div. payment is a good thing. I think the people who r against this move (Directors, tycoons...etc) r trying 2 blow this out of proportion, due 2 their vested interests.......

6. Nov 22

Actually Rukshan the effective taxation on banks is about 50%.

In addition banks are required to maintain large amounts as shareholders funds because of the capital adequacy system to fund the loans that they give. Increasing taxes on banks makes it difficult generate the returns expected by shareholders.

The larger banks have capital bases well over LKR 10,000 million, you have to generate a lot of profits to give the shareholders a return on that.

By forcing banks to pay dividends, you restrict capital growth and future growth in loans. So if you think banks should pay out dividends, it will be at the cost of all the borrowers, retail and corporate, who will no longer have ready access to bank finances. Are you trying to say this is a good thing?

Although the budget overall was not particularly bad as far as budgets here seem to go, this is just a stupid rule.

5. P Nov 22

It is very convinient to tax the private sector and its employees. They seem to be the scape goat for any government when presenting their budgets trying to bridge their deficits.

It is time the GOSL starts to tax the public sector President downwards. There is no excuse that they are earning poor salaries.

Look at the perks they enjoy, are they not the contributions made from the private sector taxes. Is the public sector service oriented and providing the public an efficient service.

Your guess is good as mine.

It is high time the tax department is given instructions to visit top ranking government servants residences an asses as to how they are living.

I am sure they themselves will be surprised the luxury some live in.

It is high time that legislature is inacted where the public sector too should contribute to the governments coffers so that a few who are always burdened with unfair taxes could be relieved.

4. aaa Nov 22

Well, guys its upto shareholders to invest in companies that give a good return. It's not government business to ask companies to do what the government wants. Its upto the management/directors/sharehoders to decide what they want to do with their profits.

If companies are to pay high dividends, how are they going to fund future expansion? by borrowing again? This will add to their cost. This is totally against accpeted market practices.

3. j Nov 21

You Have Forgotten
One thing we always seem to miss,What about the Govt Servants as well the public sector, They too should pay their dues in taxes,

Very convenienty they opt to be passengers scrounging off the few Dedicated and Patriotic,Tax payers in the country.

It is about time that they stop leeching and sucking the few tax payers dry and do something Patriotic and pay their Taxes as well.

It is a Lame excuse bringing out stupid arguments that These sectors are poorly paid.

All you People are indebted to the few you infact owe them very much.

2. Rukshan Nov 21

It's high time that companies pay up to the poor shareholders that "gain" only by dividents.

Its the big fish that have been able to gain up to now, by shuffling the stocks.

Banks, well guys you are the best performing sector for centuries, so why not let your shareholders gain some.

1. peter Nov 21

This is an excellent move (at least until) many of the local companies fall in line with the best corporate governance and best corporate practices.

It will boost investor confidence in companies and prevent creation of empires that ultimately forget their duty to shareholders.

For the banks, what i can say is that if they become more careful about thier lending practices, this will not have a big impact. Besides this will help development of debt market by which banks can borrow and beef up capital.

Companies will also prefer to borrow more and thereby increasing equity returns.

Overall, in the long term this move will help creation of healthy companies.