By Victor Silva
A large percentage of those who belong to the middle income
category invest their savings in Banks and other Financial
Institutions in order to earn interest income which they use to
keep the home fires burning.
People who fall into this category are not capable of
dabbling in the share market or get involved in similar
transactions which result in higher returns, and therefore, are
satisfied with the fairly reasonable interest income they get on
their Fixed Deposits. Among those who fall into this category
are the following:-
= Widows who invest the retiring gratuity, EPF
contribution, compensation, receipts from insurance policies
and other such receipts they get on the death of their
husbands. (Widowers and orphaned children too fall into this
category).
= Retired mercantile sector employees (including those who
have retired prematurely due to ill-health or redundancy) who
invest their retiring gratuity and EPF contribution.
= Self-employed people and those in business who invest
their savings in order to lead a quiet retired life.
= Victims of accidents and other unfortunate incidents who
invest whatever they get as compensation.
= People who sell their ancestral properties (and move into
smaller houses) and invest the balance money in order to bring
up their children or lead a quiet retired life.
With effect from 1st April 2002, the UNF Government
introduced a With-holding Tax (WHT) of 10 per cent on interest
income exceeding Rs.72,000/= per annum. At that time it was
announced that the WHT was introduced in order to streamline the
collection of taxes and also to encourage savings by limiting
the tax on interest income to a maximum of 10 per cent.
(Hitherto interest income was taxed with other income and the
highest tax slab was 35 per cent). In fact, the then Deputy
Minister of Finance, Bandula Gunawardene made a public statement
that anyone was free to split his/her fixed deposits to avoid
the payment of WHT (i.e. to reduce the value of each Fixed
Deposit so that the interest income does not exceed Rs.72,000/=)
but that such persons should include such interest income (on
which WHT has not been recovered) in his/her Annual Return and
pay income tax thereon. Accordingly, those who were not income
tax payers were able to avoid the payment of WHT by splitting
the Fixed Deposits and the regular income tax payers received
the benefit of paying a tax of only 10% on their interest
income. In order to grant more relief to middle class interest
income earners, the cut-off point for levying the WHT was raised
to Rs.108,000/= with effect from January 2003.
This limit (of Rs.108,000/=) has not been increased since
then and the Government has been gradually trying to squeeze the
maximum amount possible from the WHT on interest income. With
effect from 1st April 2005 the facility granted to split the
fixed deposits in order to avoid the payment of WHT was partly
removed when the Banks/Financial Institutions were instructed to
deduct WHT if the total interest paid by each Bank/Financial
Institution to an individual exceeded Rs.108,000/= per annum.
The worst shock came when even this facility as well as the
provision to obtain a Tax Direction against the recovery of WHT
were completely removed with effect from 1st April 2006.
Provisions governing WHT and income tax
The Banks/Financial Institutions informed their depositors
that in terms of the instructions issued by the Department of
Inland Revenue, the following will be applicable with effect
from 1st April 2006:-
i) WHT of 10 per cent would be deducted from every
interest payment if the total interest income receivable by a
person from all Fixed Deposits held by him/her exceeds
Rs.108,000/= per annum. (i.e. WHT of 10 per cent will be
recovered from each Fixed Deposit irrespective of the interest
thereon if the aggregate interest earned by such individual
from any one or more Banks/Financial Institutions exceeds
Rs.108,000/= per annum).
ii) The facility granted prior to 1st April 2006 to
obtain a Direction from the Department of Inland Revenue
through Banks/Financial Institutions against the deduction of
WHT on interest income where the total income of a person is
less than the Tax Free Allowance of Rs.300,000/= per annum,
will not be available.
Thus, the Government has well and truly throttled the middle
income category who are already burdened by the ever-increasing
cost of living.
The following provisions should also be noted:-
= Each individual is given a Tax Free Allowance of
Rs.300,000/= for the year and the balance income (known as
Taxable Income) is taxed as shown below:-
- On the first Rs.300,000/= of the Taxable Income @ 5 per
cent.
- Each succeeding slab of Rs.200,000/= @ 10 per cent, 15
per cent, 20 per cent, 25 per cent and 30 per cent
respectively.
- The balance Taxable Income @ 35 per cent.
= The interest income on which WHT has been recovered
cannot be included when computing the Taxable Income.
= The WHT of 10 per cent recovered from interest income
cannot be set-off against income tax payable, and a refund of
such WHT cannot be claimed even if the person is not liable to
pay income tax.
= Only interest income received from Banks/Financial
Institutions is liable to WHT. Interest income received from
any other source is not liable to WHT.
= A concession is granted to Senior Citizens (i.e. those
who are 60 years of age and above). In addition to the cut-off
limit of Rs.108,000/= they are given another Rs.200,000/= per
annum provided such interest income is received from the State
Banks or the National Savings Bank.
Blatant discrimination
The blatant discrimination against middle-class citizens who
depend entirely on the interest income get from Banks/Financial
Institutions can be very clearly seen by considering the flowing
hypothetical cases:-
a) Mr. A was a Mercantile Sector employee who
retired prematurely due to ill-health. He is 50 years old and
therefore not a Senior Citizen. He has invested his entire EPF
savings and retiring gratuity in a Finance Company. His total
interest income for the year is Rs.107,900/= and has no other
income. Mr. A is not liable to pay WHT as his interest income
is less than Rs.108,000/= and therefore, will get the full
interest income into his hands.
b) Ms. B. is a middle-aged widow of a Mercantile Sector
employee who died while in service. She has invested all the
money she got on his death (e.g. Compensation, EPF, Retiring
Gratuity, Insurance Policy, etc.) in Finance Companies in
order to bring up her children. Her total interest income is
Rs.108,100/= per annum and has no other income. A WHT of
Rs.10,810/= will be recovered from the interest (as the total
interest income exceeds Rs.108,000/=) and therefore, she will
get into her hands only Rs.97,290/=.
c) Mr. C is a businessman whose annual income
from his business is Rs.300,000/=. He does not earn any
interest income. As the Tax Free Allowance for the year is
Rs.300,000/= he is not liable to pay income tax and therefore,
he gets into his hands the full income of Rs.300,000/=.
d) Mr. D is a retired businessman who has sold
his business and invested the entire sales proceeds in Finance
Companies. His total interest income is R.300,000/= for the
year. He has no other income. He is liable to pay a WHT of
Rs.30,000/= and therefore, gets into his hands only
Rs.270,000/=.
e) Mr. E is a Mercantile Sector employee whose
salary for the year is Rs.500,000/= and gets an interest
income of Rs.100,000/= from a Finance Company. Although he
does not have to pay WHT on interest income (as it is less
than Rs.108,000/=), this amount should be included in the
Taxable Income. His total income including interest income is
Rs.600,000/= and the income tax payable by him is computed as
given below:-
Total income - Rs.600,000/=
Less
Interest income on which
WHT has been recovered -NIL
Assessable income Rs. 600,000/=
Less
Tax free allowance (Rs.300,000/=
Taxable income Rs. 300,000/=
Income Tax on Rs.300,000/= @
5 per cent is Rs.15,000/=
f) Mrs. F is a middle-aged widow who has sold her
ancestral property and invested the money in Finance Companies
in order to bring up her children. She gets an interest income
of Rs.600,000/= and therefore, Rs.60,000/= is deducted as WHT
and only the balance Rs.540,000/= is given to her. She has no
other source of income.
g) Mr. G lends money to traders and other businessmen
and charges interest on a daily/weekly/monthly basis. His
annual interest earning is Rs.600,000/=. He has no other
income. As his interest income is not subject to WHT, the
income tax payable by him is computed as follows:-
Total Income
(i.e. Interest Income) Rs. 600,000/=
Less
Interest Income on which
WHT has been recovered -NIL
Assessable income Rs. 600,000/=
Less
Tax free allowance (Rs. 300,000/=)
Taxable income Rs. 300,000/=
Income tax on Rs.300,000/=
@ 5% is Rs. 15,000/=
The extremely unfair treatment of the middle-class interest
income earners and the gross injustice meted out to them are
clearly highlighted above. Many more examples can be given if
not for constraints of space. For the sake of brevity the
following discriminations are highlighted:-
i) Although Mr. A’s interest income (Rs.107,900/=) is less
than that of Mrs. B (Rs.108,000/-), he gets into his hands the
total interest of Rs.107,900/=.as WHT is not deducted from him.
Mrs. B is very unfortunate as she has to pay WHT just because
her interest income exceeded the cut-off point of Rs.108,000/=
by a mere Rs.100/=. For that extra Rs.100/= she ends up paying a
WHT of Rs.10,810/= . Is this fair?
ii) Mr. C. does not have to pay any income tax on the
business income of Rs.300,000/= whereas Mr. D has to pay
Rs.30,000/= as WHT on his interest income of Rs.300,000/=. Is
this fair?
iii) Although Mr. E and Mrs. F get the same income (i.e.
Rs.600,000/=), Mr. E pays only Rs.15,000/= as income tax whereas
Mrs. F who has to totally depend on interest income from
Banks/Financial Institutions has to pay Rs.60,000/= as WHT. The
tax payable by Mr. E amounts to only 2.5 per cent of his total
income whereas Mrs. F. has to pay 10 per cent as WHT. This also
means that while Mr. E pays a paltry 2.5 per cent as income tax
on his interest income of Rs.100,000/=, Mrs. F has to pay 10 per
cent as WHT. Is this fair?
To be continued tomorrow
