- Financial Hub Issues
The effective tax regime in Singapore is 16% and for multi-national companies setting up their regional offices in that city state, the tax is further reduced to 10% as an incentive, a banker said.
Rajendra Theagarajah, Managing Director Hatton National Bank plc (HNB), speaking at a budget seminar on Tuesday said that it’s in this backdrop that Sri Lanka has to compete in trying to be a financial hub in the region.
The seminar was organized by KPMG in Sri Lanka.
He said that though the corporate income tax structure in Budget 2011 has come down by seven percentage points, from 35% to 28%, and VAT on Financial Services by eight percentage points, from 20% to 12%, bringing the effective tax rates on banks down by 25 percentage points, from 65% to 40%, there still exists that dichotomy, ie of Singapore’s tax regime of 16%, vis-à-vis that of Sri Lanka’s 40%.
Theagarajah further said that the introduction of the “Mandatory contribution to Central Bank’s ‘Investment Fund Account,’” ie 8% of banks’ profits as proposed in the Budget, would mean that a bank making a Rs. 10 billion operating profit, which translates to a sum of Rs. four billion to its bottom line, will also find another Rs. two billion captured by the new fund as a means to provide “cheap” credit to the SME sector.Under existing regulations banks can leverage upto 10 times the value of their capital and reserves, ie for every such rupee, they could lend up to Rs. 10. Theagarajah said that his Bank is a risk taker. But such avenues will be stifled if they have to plough part of their earnings to the proposed investment fund. However Central Bank of Sri Lanka Governor Ajith Nivard Cabraal who was another speaker at this event said that compliant banks will not be required to follow this direction. Theagarajah further said that the liberalization of borrowings from overseas channels, though posing a challenge to the industry, will however find the bigger banks being able to withstand the storm, but, on the whole, this may create a paradigm shift in how the industry operates. He also cautioned that the introduction of fair value accounting from 2012, as opposed to historical accounting, may cause problems, because some of the fixed assets held by banks may not be that easy to dispose of, though from a market perspective the values of such assets may be high.