Dhammika slams banking sector taxes
Prominent businessman Dhammika Perera blasted the tax policy of the Government, claiming that it is more lucrative to invest in Treasury Bills than it is to be a shareholder of a bank in Sri Lanka.
In an exclusive interview with The Sunday Morning Business, Perera, who is often referred to as “the richest man in Sri Lanka”, said that this was because a whopping 63% of a bank’s profits are taxed.
“It is a big myth that the banking sector is making huge profits. There are hardly any big profit margins as the return on investment to a bank’s shareholders is less than the annualised Treasury Bill rate.”
To back his statements up, Perera broke down the individual taxes applicable to a bank’s profit before all taxes.
“The income tax is 36% of profit before all taxes (PBAT), the Value Added Tax on Financial Services (FSVAT) is 16% PBAT, Nation Building Tax (NBT) is 2% PBAT, Debt Repayment Levy (DRL) is 8% PBAT, and the Crop Insurance Levy is 0.1%. How would banks make big profits?”
He added that this led to the risk premium to shareholders of Sri Lankan banks plummeting over the past four years.
Perera pointed out that, apart from the People’s Bank, the risk premium rates of all leading licensed commercial banks have hit negative levels in this period. This includes Commercial Bank, Hatton National Bank, Sampath Bank, Bank of Ceylon, and People’s Bank which have hit negative levels in 2018 as they declined to -1.3%, -1.9%, -1.0%, and -2.6% respectively. The People’s Bank’s risk premium rates declined to 1.2% in 2018 from 25.2% in 2014.
Amongst these five banks, Bank of Ceylon emerges as the lowest risk premium rate bank. It had a risk premium rate of 6.7% in 2014, which gradually came down to 5.3% in 2015, 3.6% in 2016, and 2.7% in 2017, before hitting negative level of 2.6% in 2018.
Hatton National Bank is the second lowest as it has seen a gradual decline from 5.7% in 2014, 5% in 2015, and 4% in 2017 which reached to a negative 1.9% in 2018.
Commercial Bank’s risk premium rate declined to 5.3% in 2015 from its 6.7% in 2014 which then gradually declined by 3.6% and 2.7% in 2016 and 2017 respectively. It went down further to -1.3% in 2018.
Unlike other banks, Sampath Bank did not come across a gradual decline as it increased to 7% in 2015 from 6.2% in 2014 and remained the same in 2016 before going up again to 7.2% in 2017. However, it came down further to -1% in 2018.
The People’s Bank premium rates, which were at 25.2% in 2014, declined to 15.5% in 2015, 11.6% in 2016, 11.4% in 2017, and dropped significantly to 1.2% in 2018.