Flash Report /
Sri Lanka

Sri Lanka: Banking Sector - Budget 2022 impact

  • Tax surcharge proposed in budget 2022 similar to super gains tax in 2015

  • Accounting treatment not determined yet; 2015 SGT was only a balance sheet adjustment

  • Adjusting for the proposed one-off tax, we calculate an approx. 2%-4% impact on bank NAVs

Kavinda Perera
Kavinda Perera

Head of Research

Asia Securities
15 November 2021
Published by

Following the 2022 budget proposal for a one-off tax surcharge of 25% for all entities that reported profits of LKR 2,000mn, we highlighted that several banks in our coverage would be impacted. The accounting treatment and the actual methodology of calculation is yet to be announced. Therefore, we conservatively calculate the potential impact of this proposal on Bank NAVs based on a few simple assumptions; 1) new tax is calculated based on reported CY20 PBT (taxable profit could vary from the reported PBT. In 2015 ‘Super gains Tax’ scenario, the former was lower), 2) all other charges including dividends remain the same for both pre- and post-SGT calculations and 3) no other specific impact is considered (for example, any swings in OCI) which can lead to a change in the reported NAV vs. our forecast at year end. Based on this methodology, and considering only the impact of the surcharge, we believe that the banks’ NAV would see an approx. 2.0% - 4.0% impact. As a result, adjusted for the tax surcharge, we see that the banks are still trading at approx. 0.5x BV on CY21 and CY22 estimates.

Tax surcharge proposed in budget 2022 similar to super gains tax in 2015

Budget proposals for 2022 included a tax surcharge on individuals or companies with taxable profit over LKR 2,000mn for the year of assessment 2020/21. This is similar to the ‘super gains tax’ introduced in the 2015 budget, using the year of assessment as 2013/14, for entities which reported profits over LKR 2,000mn. At this stage, the implementation methodology of the latest tax (such as the taxable base) is not announced. The exact chargeability and the impact will depend on this, but for purposes of this analysis, we have assumed that the tax will be levied on PBT of the banks, which, on historical grounds is higher than the actual taxable base.

Accounting treatment not determined yet; 2015 SGT was only a balance sheet adjustment

In 2015, the CA Sri Lanka provided guidelines for the companies on the accounting adjustments to be made for the SGT. Accordingly, companies were required to adjust the tax in the opening retained earnings reported in the Statement of Changes in Equity as the first day of the reporting financial year. Should CA SL recommend a similar treatment, banks would see an adjustment in its book value in 4Q CY21, that would be reflected in the 2021 full year results – once the proposal is passed in Parliament. If not, going by the current accounting standards, the impact would have to be booked in the P&L in CY21 (if implemented before annual CY reporting cycle).

Adjusting for the proposed one-off tax, we calculate an approx. 2%-4% impact on bank NAVs

First of all, we calculate the impact based on the estimated NAV for Dec 2021 Bank NAVs based on a few conservative assumptions; 1) new tax is calculated based on reported PBT (in 2015, taxable profit for the surcharge was lower than the reported PBT), 2) all other charges including dividends remain the same for both pre and post SGT calculations, and 3) no other specific impact is taken into account (for example, any swings in OCI) which can lead to a change in the NAV from actual reported numbers. However, in 2015 the taxable profit base eventually used for the SGT calculation was lower than the PBT figure – which indicate that our assumed tax implication is conservatively high.