Discussing the 10% WHT on interest and the IRD’s dysfunctional refund system
If interest income is the only source of earnings, individuals earning up to Rs. 4.4 million per annum will qualify for a refund under the proposal to increase Withholding Tax (WHT) on interest to 10%.
To earn Rs. 4.4 million in interest at the current interest rates, one would need deposits exceeding Rs. 50 million. How many people have that kind of wealth? This means the majority of individuals subject to WHT will require refunds, contradicting the principle of fair taxation, where those not liable for tax should not be compelled to pay and later request refunds.
The proposed increase in WHT on interest from 5% to 10% has raised significant concerns, particularly among retirees, small savers, and low-income depositors. This WHT hike comes at a time when purchasing power has eroded and interest rates are dropping. For many citizens, interest income is not merely supplementary but a vital component of their financial survival as well.
While the Government has promised refunds to those whose total income falls below the taxable threshold, the reality is that Sri Lanka’s refund mechanism remains plagued by inefficiencies, excessive red tape, and delays.
Systemic failures in refund mechanism
The inefficiencies in the tax refund system have long been a source of frustration.
Taxpayers are often subjected to harassment with repeated requests for documentation, reconciliation to the third-party declarations, and unexplained delays. Even those who are eligible for refunds under income tax face an uphill battle, with the process often deterring many from pursuing their rightful claims.
The current system effectively forces taxpayers below the taxable threshold to lend money to the Government through delayed refunds. This situation disproportionately affects small savers and depositors, and undermines the principles of equity and fairness that should be at the core of any taxation policy.
Lessons from SVAT and the importance of trust
The Simplified Value-Added Tax (SVAT) system, which largely only prevails in Sri Lanka, was retained as exporters lobbied against its abolition, citing the inefficiencies of the Inland Revenue Department’s (IRD) refund mechanisms and the knock-on implication on cash flows. This highlights the mistrust in the IRD’s refund system.
When influential exporters protested, it was heard and SVAT was not abolished, but will the voice of the common man impacted by increased WHT on interest be heard?
Reforms needed to restore fairness and trust
To address the pressing concerns regarding the WHT system and restore fairness, the Government must place trust in taxpayers and implement straightforward mechanisms that empower them.
- Accepting volunteer declarations made by individuals: Individuals who believe their total income does not exceed the taxable threshold and that WHT will result in a refund should be allowed to submit a declaration to financial institutions or WHT agents, stating that WHT should not be withheld.
This would eliminate unnecessary withholding and avoid the complexities of the refund process for low-income earners. Placing trust in taxpayers to make such declarations reflects a system of fairness and mutual respect.
If the individual makes a false declaration, the IRD then has the full authority to proceed with its administrative process to hold such individuals responsible. Under a recent amendment, information prescribed by the Commissioner General of Inland Revenue has to be sent in an electronic form on a regular basis by banks, financial institutions, and other specified institutions. This information, if used properly, can deal with any attempt of evasion.
2. Automatic recognition of WHT credits based on WHT certificates: WHT credits should be automatically applied to individuals’ accounts, based on WHT certificates and their declarations in the tax returns, without being contingent upon declarations made by banks, financial institutions, or other WHT agents.
Relying solely on third-party institutions to declare WHT amounts demonstrates a lack of trust in taxpayers themselves and creates unnecessary bottlenecks. The system should prioritise the taxpayer’s submission as the primary source of truth.
In short, if an individual taxpayer has original WHT certificates or confirmations from banks or financial institutions of the tax withheld and interest income, the taxpayer should be entitled to instant credit without any questions or harassment and the IRD should follow up with withholding agents, if required.
These reforms require no drastic overhauls of the system but a shift in approach toward fostering a culture of trust and simplification. Without these changes, the WHT system will continue to be perceived as punitive and bureaucratic, undermining public confidence in the tax system.
As Sri Lanka navigates its economic challenges, rebuilding trust in the tax system is paramount. The Government must ensure that taxation policies uphold fairness, equity, and efficiency – principles that are essential for fostering compliance and achieving long-term economic stability.
It should be well ingrained in the hearts and minds of policymakers, tax administrators, taxpayers, and tax professionals that without a proper functioning refund system there can never be an efficient and effective revenue administration. With a dysfunctional refund system, it will be a malfunctioning revenue administration and every reform endeavour is bound to fail.
Fundamentally, the principle of taxation has to be strictly followed and cannot be compromised. The fundamental principle of taxation is that no citizen should be asked to pay a tax that he is not liable to pay and go in search of a refund. This cannot go on.
Solution
The solution for people who have a refund issue because of the 10% WHT on interest income is to place their deposit in Government securities, namely Treasury bills or bonds which are not subject to WHT and may currently offer a higher return than a deposit in a bank. As a matter of caution, one must seek the required advice before placing monies as suggested above.
Read the paper article on The Morning here:
A solution envisaged for an unbearable burden – themorning.lk
