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| Sunday, 14 September 2003 |
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| News Business Features Editorial
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Withholding Tax on interest income and related issues by P. Guruge, Advisor, Fiscal Policy, Ministry of Finance The application and effect of the provisions on withholding tax (WHT) on interest income in the Inland Revenue Act No. 38 of 2000, amended primarily by the Inland Revenue (Amendment) Act No. 19 of 2003 are discussed here. These provisions insofar as they relate to Government Securities and other interest bearing deposits are effective from April 1, 2002, those relating to corporate debt securities are effective from November 1, 2002. Interest on Govt Securities Primary Market Transactions WHT at 10 per cent on the interest on Govt. Securities (Treasury Bonds, Treasury Bills and Central Bank Securities etc.) will be recovered from the primary dealers at the time of issue of such security, bond or bill to the primary dealers. The interest for this purpose will be the yield to maturity over the full tenor of such security, bond or bill. This 10 per cent WHT will be deducted on interest payments on Govt. Rupee Loans as well. The interest on which such WHT at 10 per cent has been deducted will not form part of the statutory income or assessable income of the primary dealers concerned and, accordingly, such primary dealers are not entitled to any tax credit on account of the WHT. Secondary Market Transactions Income from secondary market transactions may represent one of the following: i. Interest Income - This will be exempted from tax in the hands of any person other than a company or any other person whom such income accrues as business income (Section - 10 (eeee)) This will be applicable to any such interest arising or accruing on or after 01.04.2002. As a result, there will be no difference between instruments issued prior to 01.04.2002 and other instruments. ii. Business Income - This will be exempted in respect of any person (Section 15 (t)) This will also be applicable to any such profits accrued on or after 01.04.2002 - irrespective of the date of original issue of such security. iii. Capital Gains - This is not a taxable source of income on or after April 1, 2002. Accordingly, it is important to identify whether the income from secondary market transactions constitute interest income or business income. Theoretically, the amount of discount allowed at issue of the security in the secondary market should be considered as interest, either fully or proportionately depending on the period of ownership. However, in case of certain companies such as financial institutions, they claim that such interest should also be treated as business income. If that position is to be accepted under the Inland Revenue Act, then such portion of interest deemed to be business income as a source should be removed from exemption under Section 15 (t) and as a result, such interest income would qualify for notional tax credit which is explained later. If it is interest income: i. Individual and other bodies of persons other than companies need not declare such income in their respective tax returns since such interest income has been exempted. ii. Companies should - * Declare in their tax returns such income, grossed-up by 1/9 of the interest received. However, if any expenditure is involved, the net interest should be considered for grossing up. * Calculate the tax on such grossed-up amount in the normal manner, and * Claim a "notional tax credit" of 10 per cent of such grossed-up interest. The "notional tax credit" is available - only on secondary market transaction on Govt securities on which WHT has been deducted at the primary market or issued prior to 01.04.2002. * If the relevant interest form part of such assessable income of the company concerned for the relevant year of assessment, and * If supported by an appropriate audit certificate from an approved accountant. (Note - No refund can be claimed on this notional credit). Other interest bearing deposits The meaning of "interest" in relation to the deposit of a sum of money by a person has been widened to include any payment accruing to the benefit of such person for the money deposited. Therefore, the interest on savings accounts, fixed deposits, time deposits or any other deposits, savings certificates, certificates of deposits, or other similar deposits by a bank or financial institution, whether approved or not by the Central Bank, will be subject to WHT at the time such interest is paid or credited. Any discount allowed is deemed to be interest paid at the time of allowing such discount. Savings, fixed and time deposits WHT at 10 per cent need not be deducted if - The interest paid or credited per deposit by an individual (singly or jointly) is, effective from January 1, 2003 less than Rs. 9,000 per month or Rs. 108,000 per year. Interest paid or credited per month or per year means the amount credited during any month or during any year. This threshold will not apply to interest on - Savings certificates, certificates of deposit, or similar deposits or govt rupee loans, and Any deposits made by non-individuals, such as clubs, associations, societies (other than charitable institutions). In such cases total amount of interest will be liable to WHT. * The total interest paid or credited on deposits made by a charitable institution is less than Rs. 12,000 per month or Rs. 144,000 per year. As an individual or charitable institution could request a bank or financial institution in writing to deduct WHT on interest paid or credited, which is below the aforesaid threshold, the bank or financial institution should comply with such request. (This will entitle the depositor to the benefit of the WHT as the final tax). Tax credit WHT at 10 per cent will be the final tax on the relevant interest income from savings, fixed and time deposits to any person other than a company or any other person receiving such interest income as business income. The persons to whom WHT at 10 per cent is the final tax cannot claim tax credit for the WHT recovered. Any company (including a primary dealer*) or any other person in receipt of such interest as business income should: - Declare the gross interest income, (if the source is business the expenses can be claimed) - Compute the tax payable in the normal manner, and - Claim credit for such WHT if such income is included in the assessable income. (The tax deduction certificate should be furnished). * A primary dealer is not entitled to tax credit, only in relation to WHT on interest on primary market transactions. To be continued |
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