Thursday, June 1, 2023

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Private sector lobby groups up in arms against 25 percent surcharge tax 

Concerns were raised regarding the dampening impact the new taxes may have on investor confidence, particularly since many of the new measures are one-off in nature, and in the case of the surcharge tax, it is retroactive in operation. 

The misalignment between the allocations provided in the budget speech and the priorities of the economy has become the talk of the town at present. 

The high allocations for defence, road development, and generally high levels of capital expenditure over allocations for education, healthcare, and skill development were identified as being problematic.

Under this et up the lobby groups within the country’s engine of growth – private sector – are reigniting protest against the controversial 25% surcharge tax on companies who had made profit of over Rs. 2 billion in FY21.

Apart from the ad-hoc nature of the taxation, concerns are being renewed as it goes against the principles of fair and best local and global practices. 

Private sector warned that surcharge tax unless revoked or injustice rectified would deal a severe blow to Sri Lanka’s already embattled reputation among international and local business 

“Firstly, slapping a 25% surcharge on already taxed past profit is unethical,” they warned, adding that Sri Lanka is facing global ridicule of being a nation resorting to taxing retained earnings/reserves. 

They argued that it also insults international best accounting standards and practices which Sri Lanka incorporated firms have been complying with. 

The surcharge tax being of retrospective effect also violates the very basic tenant of law that a company is entitled to conduct its affairs based on the taxes then prevalent.

“We understand that the Government needs money but collect it the proper way,” they emphasised. “Ideally the Government should raise the desired amount by an across the board new tax applicable to all.” 

Announced in the 2022 Budget the one-off tax aims to raise Rs. 100 billion. “Even if it is an unkind tax the Government needs to be fair in its administration rather than singling out a class of companies based on a threshold of Rs. 2 billion and above,” it was pointed out.

Tax analysts suggested that the Government should exclude profits of Rs.1 to Rs.1,999 million made by companies when computing the 25% surcharge tax liability. 

The basis for this recommendation is that companies coming under the new tax must be given the same benefit (zero tax) enjoyed by those who had made a profit of less than Rs. 2 billion. 

Citing an example, they said a company that made a profit of Rs. 2,500 million in FY21, should be taxed only on the basis of 25% of Rs. 501 million and not Rs. 2,500 million.

Private sector sources also said that the Government, by imposing 25% surcharge tax was being inconsiderate of the capital employed by the companies to earn such profit or the return on investment. 

There has been no consideration to the fact whether the profit had been earned through borrowed funds that need to be serviced. Companies had paid dividends too based on FY21 profits made.

Analysts also said Sri Lanka’s credibility on consistency in taxation is tarnished by the surcharge. 

Companies and investors had respite for about five years after the previous regime imposed the merciless “super gains tax” also in retrospective effect irking the private sector and as a sovereign assured it will be one off.

However, come 2022 the same sovereign entity, the Government of Sri Lanka, breaks its promise with the latest surcharge tax.

“From 2016 up to 2022 no such tax was imposed and accordingly; government has created a legitimate expectation to the taxpaying community no such surcharge will be imposed. 

Therefore, the latest surcharge is a violation of the rule of natural justice that has been guaranteed by the sovereign (Sri Lanka) and also amounted to breach of such cardinal principle by the Government itself,” opined analysts. 

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