SRI LANKA CENTRAL BANK TO REDUCE BANK TAXES

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 around 60 percent. The high taxation while slashing capital available for banks has also brings down profits making shareholders also less willing to pump in money.

Fitch Ratings, in a sector report last year said high effective taxes, and "constrained profitability" was reducing return on equity of banks.

Cabraal said the issue high taxes on banks are being taken up by a tax commission appointed last year to rationalize Sri Lanka's tax system.

"Once the tax commission's report is out there will be changes," Cabraal said. "They are specifically addressing this issue.

"Taxation will be reduced gently over a period of time. Each year there will be gradual reduction as other sources of tax are strengthened.

The tax commission's report was to have been used in preparing the 2010 budget under a deal with the International Monetary Fund. The budget was put on hold till after presidential and parliamentary polls due in the first quarter of 2010.

source - www.lbo lk

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