November 16, 2006 (LBO) – Sri Lanka’s government has introduced a controversial new tax to encourage dividends payment of listed companies, while giving incentives for the unit trust industry. Firms that do not distribute dividends would be subject to a penal withholding tax, according to new proposals released in the 2007 budget.
“A company should try to distribute at least 50 percent of its distributable profits,” President and Finance Minister Mahinda Rajapakse said.
“If dividends do not reach one third, a 15 percent tax would be levied on the difference between dividends paid and the one third threshold.”
The government also proposed to lift the stamp duty on units trust certificates (mutual funds) which was re-imposed in the last budget.
Profits on share market transaction made by unit trusts would be exempted from income tax.
A National Wealth Corporation, a state-owned mutual fund cum asset management firn, would be set up to put government owned land and other assets to better use.
The public would be able to invest in this entiry with a minumum subscription of 500 rupees.
A tax on capital gains made by employees who recieved stocks through employee share ownership has been lifted.
Insurance firms would no longer be able to set of losses in its life division against general insurance or vice versa.
This can reduce the net profits of insurance firms. The government is also placing limits on the volume of bad debts that can be charged as an expense for tax purposes in banks.