Under the current tax structure, Rs.144,000 is allowed as a threshold before incidence of tax on assessable income. The Department of Inland Revenue has instructed finance companies, banks etc., not to collect withholding tax if the total monthly income of a person from interest yielding deposits is not in excess of Rs.12,000 per month.

A large number of persons in the middle and lower income groups have been able to eke out an income to meet their costs of living by placing fixed deposits with banks and finance companies and also investing in treasury bills and repurchase agreements through primary and secondary market dealers in such instruments. With the rapid decline of interest rate yields on all these instruments since mid-2001, most persons of the middle and lower income groups looked forward to the first budget of the UNF Government for essential relief against the rising costs of living.

The Minister of Finance has, in the course of his Budget speech, stated that "Rather than tax interest earnings at the same high rates as other sources of income, we will reward those who save by lowering the tax rate on interest received. Interest earned will be excluded from computation of assessable income. The tax rate will be only 10%. This will be deducted and withheld at the time of payment or crediting of the interest."

Large numbers of persons retired employees, widows subsisting on the pensions and fixed deposit incomes left to them by their deceased spouses will be severely damaged by these new proposals. Such persons live on the interest yield from their retirement benefits, which range from around Rs.600,000 to Rs.1,000,000 sometimes supplemented by a small pension of around 5,000 per month.

If they had been prudent during their service under government or a firm they may also have a small residence which relieves them of having to make substantial monthly rental payments.

The NSB monthly interest rates are now around 14% per annum and at this rate the annual income (1/12 payable monthly) will vary between 84,000 and 140,000. Even at the current tax threshold of Rs.144,000 such persons will not be liable to make any payment as income tax, or if in the case of a mercantile employee where the pension would be liable for tax - a marginal tax liability of around 5000. Though the new proposals provide for the tax threshold to be increased to 240,000 these persons will now have to pay as tax at source (which cannot be reclaimed) amounts ranging from Rs.8,400 to 14,000 in the cases quoted above. Does the Minister regard this as a reward to those who save.

Of course, highly paid professionals such as senior company executives, lawyers, medical specialists, etc., whose incomes run into several hundred thousand rupees per week and who would have to pay tax at the highest marginal rate of 35% on interest earned from investments in fixed income securities will benefit immensely from a reduction of 25% on their interest income from such securities. The savings rate in Sri Lanka is at a dismally low level and to improve this we must make it attractive for the millions of small persons to save at least a little from their income. Many entrepreneurs are endeavouring to promote this by inducing the recipients - such as numerous suppliers of raw materials - to open savings accounts and making payments to such accounts so that the saving habit is gradually inculcated into them.

High income persons benefiting from a 25% bonanza will undoubtedly spend such ‘pennies from heaven’ on ostentatious consumption - high living, frequent trips abroad, etc. and there will not be any significant increase in level of savings.

Tax and Investment Consultant