Tax Brake

Mar 07, 2010 (LBO) – Sri Lanka has to cut its high rate of tax on banks to allow the sector to build capital as the economy is poised to grow after a war ended last year, a top banker has said. Taxation has in the past and continues to be in the present a contentious issue for the Banking industry,” Hatton National Bank chief executive Rajendra Theagarajah told shareholders in its annual report.

“The sector faces an effective rate of taxation that stands at approximately 60 percent the highest amongst similar economies in the Asian region – and is an undisputed dissuasion to capital formation.”

In Sri Lanka, profits from domestic banking operations are taxed at 35 percent and foreign currency units 20 percent but another effective income tax exists in the form of 20 percent ‘financial value added tax’.

The tax is charged on value added, which mostly consists of again profits and wages.

Sri Lanka’s central bank Governor Nivard Cabraal has said that a presidential taxation commission was addressing the issue and there were plans to gradually bring the level of bank taxation down over several years.

Sri Lanka has a high spending state, which ran deficit of abour 10.23