The one-off 25% super gains tax could raise the effective tax rate on banks to as much as 70%, a top taxation expert has said.

The 25% super gains tax will apply to companies that reported more than Rs2 billion in the 2020/21 financial year: a year disrupted by lockdowns, curfews and other restrictions to contain the Covid-19 pandemic. For banks, this windfall tax is in addition to a financial VAT increase from 3% to 18%. These reversed several tax cuts in 2019 and 2020 to stimulate economic activity hit by Covid 19 and the Easter bombings a year previously in 2019.

“Most banks earn over two billion rupees in Sri Lanka,” Duminda Hulangamuwa, Senior Partner and Head of Tax at Ernst and Young Sri Lanka told a forum in November, days after the 2022 Budget. “Their effective tax rates will go up in my view, to about 70% for the last financial year.”

Most banks reported impressive earnings in more recent quarters, despite providing debt moratoriums to Covid-hit borrowers and increasing bad loans provisioning. However, that does not make the super gains tax right, but it is a desperate act.

It is the second time Sri Lanka has slapped retrospective super gains or windfall taxes. “When the Super Gains Tax was implemented in 2016 by the then government, I remember the Prime Minister in parliament saying this is the only time they are going to charge the tax,” Hulangamuwa said. However, it only set a bad precedent for other cash-strapped governments to punish large companies and cause tax uncertainty. “Now a subsequent government is in charge,” Hulangamuwa said.

The Ceylon Chamber of Commerce has said the super gains is likely to undermine investor confidence. “The private sector understands the need to identify new revenue measures to bridge the budget deficit given the impact of the pandemic on the economy,” it said in a post-Budget statement. “The imposition of the one-off surcharge tax would dampen investor confidence given the retrospective implications of such taxes.”

The chamber said the 2022 Budget failed to address the macroeconomic challenges of managing the shortage of foreign exchange in the market and refinancing debt. “The budget would have been an ideal opportunity to reassure investors, provide clarity, and build confidence,” the chamber noted. Of course, the retrospective super gains taxes go against all that.