Tax Plan

Jan 19, 2010 (LBO) – Sri Lanka is looking to reduce taxes on banks over the next few years allowing banks to generate more funds to recapitalize, as the economy is poised for a growth phase after the end of a 30-year war, an official said. “Over the next five years banks have to devise a recapitalization program,” Central Bank Governor Nivard Cabraal said.

“When they lend, the capital will also have to increase. There will be more demand. Banks also have to recapitalize and lend.”

Sri Lanka’s banks capital has been hit due to rising bad loans as the economy slumped in 2009. Loans to private businesses, which have been shrinking from the beginning of the year has now started to grow.

While some countries have used state money to prop up banks, Sri Lanka’s banks have been hit with unusually high levels of effective income tax.

In addition to a standard corporate income tax of around 35 percent, banks also have to pay a so-called financial value added tax, which is an effective tax on profits, though it is called a VAT.

Banks that have larger wage bills pay more effective taxes as the so called financial VAT which is based on expenses like wages.

Bankers have said that the effective tax rate on banks is now a