By Azhar Razak
A state of uncertainty and lack of clarity prevails over the tax-free concession presently applicable to incomes received from listed corporate debentures as the recently enacted Budget 2017 has plainly stated this concession is removed but not given details, industry officials said last week.
The Budget 2017 presented by Finance Minister Ravi Karunanayake said "the present exemption on certain dividends and interest or profits from investment on listed securities (corporate debt securities etc.) and other instruments will be removed". The Budget however did not specify the exact date this removal will be made effective or whether it will apply to both current and newly listed debentures.
"We still don’t know whether the Budget proposal will be applied immediately, or January 1 or April 1 .The next big question we have is whether this proposal will only apply to new debentures which are going to be listed in the future or will it take retrospective effect and include listed debentures offered in the past?" several stock market analysts who spoke to the Sunday Island on condition of anonymity, opined.
Since 2013, listed corporate debentures on the Colombo Stock Exchange has been a major attraction for investors mainly due to the totally tax free concession accorded to them. There is no Withholding Tax or Income Tax. For example, if a company pays Rs.100 as interest for a listed debenture, the debenture holder will get that entire Rs.100 and he does not need to declare the same as part of his taxable income.
On the other hand, if the debenture is not listed on the Colombo Stock Exchange, Withholding Tax (WHT) which is deducted at source will be applied. In addition, the interest income earned by a non-listed entity will be categorized as a taxable income and the corporate tax component applied.
Senior Vice President at Acquity Stockbrokers, Shehan Cooray, said they have made representations to the Treasury and are presently awaiting an outcome on that. However, elaborating on what the Budget statement had meant, he said listed debentures will no longer be tax free or rather WHT will in future be applicable on debentures.
"So, on the coupons or interest there will be a 14% tax and there is no notional tax which means in addition to the 14%, you can’t set off that against your final tax liability. So, on the remainder you will be paying at the individual tax rate applicable such as corporate tax," Cooray noted.
However, he said that the government might not apply the tax with retrospective effect but they may be applicable to the future coupons on the already listed debentures.
Chief Executive Officer of the NDB Investment Bank Limited, Darshan Perera , confirmed that they also made representations to the Finance Ministry on the issue.
"But apart from what was said in the Budget there is no clarity or change in the position from the government’s point of view on this so far," he said.
Last year 25 corporates raised as much as Rs.83.4 billion via listed debentures while the corresponding amount for 2014 was Rs. 54.2 billion and Rs. 68.3 billion in 2013. It has also been reported that during the last three months, eight issuers of whom five were banks raised as much as Rs.49 billion through listed debentures. The most recent was the Bank of Ceylon’s Rs.5 billion issue which was oversubscribed on opening day last week.
The main players in structuring issues in the listed debenture market are Acuity Stockbrokers Pvt Ltd., Capital Alliance and NDB Investment Bank. Agora Securities (Pvt) Ltd., Arevaand First Capital Holdings Plc also handled issues this year. Commercial Bank and People’s Bank are involved in related party issues.
The listed debentures are seldom traded on the Colombo bourse with investors preferring to hold them for tax free interest. Most such issues have been oversubscribed on opening day.
"They were an attractive parking place for spare cash particularly by companies," an analyst said. "Other fixed income instruments like fixed deposits attracted 28% tax. This is not so for individual investors."
The Budget 2017 presented by Finance Minister Ravi Karunanayake said "the present exemption on certain dividends and interest or profits from investment on listed securities (corporate debt securities etc.) and other instruments will be removed". The Budget however did not specify the exact date this removal will be made effective or whether it will apply to both current and newly listed debentures.
"We still don’t know whether the Budget proposal will be applied immediately, or January 1 or April 1 .The next big question we have is whether this proposal will only apply to new debentures which are going to be listed in the future or will it take retrospective effect and include listed debentures offered in the past?" several stock market analysts who spoke to the Sunday Island on condition of anonymity, opined.
Since 2013, listed corporate debentures on the Colombo Stock Exchange has been a major attraction for investors mainly due to the totally tax free concession accorded to them. There is no Withholding Tax or Income Tax. For example, if a company pays Rs.100 as interest for a listed debenture, the debenture holder will get that entire Rs.100 and he does not need to declare the same as part of his taxable income.
On the other hand, if the debenture is not listed on the Colombo Stock Exchange, Withholding Tax (WHT) which is deducted at source will be applied. In addition, the interest income earned by a non-listed entity will be categorized as a taxable income and the corporate tax component applied.
Senior Vice President at Acquity Stockbrokers, Shehan Cooray, said they have made representations to the Treasury and are presently awaiting an outcome on that. However, elaborating on what the Budget statement had meant, he said listed debentures will no longer be tax free or rather WHT will in future be applicable on debentures.
"So, on the coupons or interest there will be a 14% tax and there is no notional tax which means in addition to the 14%, you can’t set off that against your final tax liability. So, on the remainder you will be paying at the individual tax rate applicable such as corporate tax," Cooray noted.
However, he said that the government might not apply the tax with retrospective effect but they may be applicable to the future coupons on the already listed debentures.
Chief Executive Officer of the NDB Investment Bank Limited, Darshan Perera , confirmed that they also made representations to the Finance Ministry on the issue.
"But apart from what was said in the Budget there is no clarity or change in the position from the government’s point of view on this so far," he said.
Last year 25 corporates raised as much as Rs.83.4 billion via listed debentures while the corresponding amount for 2014 was Rs. 54.2 billion and Rs. 68.3 billion in 2013. It has also been reported that during the last three months, eight issuers of whom five were banks raised as much as Rs.49 billion through listed debentures. The most recent was the Bank of Ceylon’s Rs.5 billion issue which was oversubscribed on opening day last week.
The main players in structuring issues in the listed debenture market are Acuity Stockbrokers Pvt Ltd., Capital Alliance and NDB Investment Bank. Agora Securities (Pvt) Ltd., Arevaand First Capital Holdings Plc also handled issues this year. Commercial Bank and People’s Bank are involved in related party issues.
The listed debentures are seldom traded on the Colombo bourse with investors preferring to hold them for tax free interest. Most such issues have been oversubscribed on opening day.
"They were an attractive parking place for spare cash particularly by companies," an analyst said. "Other fixed income instruments like fixed deposits attracted 28% tax. This is not so for individual investors."
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