Sri Lanka private sector workers offered tax break to keep money in g-secs

K G P Sirikumara, Director, Legal and Compliance Department, Central Bank handing over the report to Prof. W D Lakshman

Oct 29, 2008 (LBO) – Sri Lanka said it will give a tax refund to private sector retirees if they continue to keep their money in government securities after they retire and withdraw money from a state-controlled fund.

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Under the scheme private sector workers who are part of the Employees Provident Fund (EPF), a compulsory retirement scheme, would be eligible for a higher withholding-tax-free yield on government securities.


“The return will be equivalent to a monthly pension rather than getting a terminal benefit as a lump sump when they retire,” said central bank deputy governor W A Wijewardena told reporters Wednesday.

“Any member of the EPF who wishes to do so is now given the option of investing their money in government treasury bills which will be issued to them in their name.

“They will get an interest rate 10 percent higher than the prevailing market rate,” he said.

At current rates, this works out at 1.9 percent on top of the current market treasury bill interest rate of 19 percent which will give them a return of 20.9 percent, Wijewardena said.

Treasury bill yields are quoted after deducting a 10 percent withholding tax.

Men can legally withdraw the money at the age of 55 and women at the age of 50 years.

The retirees would be given the special rate for investments in 3 to 12 months bills. For one-month bills, the central bank will decide the interest rate based on the market rates.

A unit of the Central Bank manages both the EPF and also raises revenue for the government by selling treasury securities.

Wijewardena said the EPF has 560 billion rupees in total with a monthly collection of four billion rupees and refunds of 1.5 billion rupees.

The private pension funds collectively have 20 billion rupees which they too invest in government securities.

“Although in some cases they have used the funds in their own businesses, which is not proper,” Wijewardena said.

The EPF has 2.1 million active accounts of members out of a total of 11 million accounts.

“We’re offering a risk-free, liquid investment,” Wijewardena said.

“There is an urgent need for people to be able to invest their money in safe investments given the global financial turmoil and uncertainty and the prevalence of fraud.”

To be eligible, EPF members must invest a minimum of 100,000 rupees.

No Control

While kept inside the EPF by law with no freedom to invest in alternatives, the retirement money is also charged income tax.

But after the retirement age the government has no powers to forcibly keep people’s money, and has to offer sweetners to keep the money with the government.

In 2006 and 2007 in particular, EPF beneficiaries lost billions of rupees as the central bank printed money, kept rates down and drove inflation to very high levels after fiscal policy reversed in 2004.

By early 2008 inflation shot up to a record high of nearly 30 percent, but monetary policy was tightened in the first part of the year, allowing rates to rise and inflation to fall.

Now government securities give good returns.

Financial analysts say EPF money is considered a source of ‘captive funds’ for the government which forces it to buy treasury securities at below market rates when budget deficits deteriorate, despite inflation rocketing up..

There has been growing unhappiness among some EPF holders at the way the fund is being managed.

Analysts have complained that it is being mis-used by authorities to foment financial repression to the detriment of the country and the EPF holders themselves.