COLOMBO: New taxes effective from April 2018 could drive capital away from Treasury bill and bond markets to commercial banks due to a large tax incentive available, especially for individuals. Under the existing regime, a 10 percent withholding tax was the final tax for individuals. For companies, there was a 10 percent tax credit, which was paid upfront. For individuals, there will be a final unrecoverable 5 percent tax next year, up from 2.5 percent now for bank deposits. For provident funds, which are taxed at 14 percent, clubs and societies at 28 percent, financial institutions and other firms at 28 percent, the 5 percent credit is available.
Under current law, there is a 10 percent tax credit above the quoted interest rate due to prepaid taxes, with only the balance liability to be paid. Holders of bonds ‘gross up’ on the quoted rate to declare income. In a controversial move, credit for taxes already paid until they reach maturity is being denied for holders of bonds, which analysts say could amount to a novel way of a state expropriating unarmed citizens.
