GBTI’s Chief Executive Officer, RK Sharma says a recent legislative amendment, which increases the tax rate on earnings from loans secured by bonds, is a retrograde step and discriminatory.

Sharma made the comment while speaking on Wednesday at the re-commissioning of the Guyana Bank for Trade Industry (GBTI) Regent Street Branch. This event coincided with GBTI’s launching of the Quality Lifestyle Loan Plan.

He said the measure, brought in by the Fiscal Enactments Amendment Act of 2003, constrains the banking sector which he said was by far the largest repository of domestic savings.

The amendment stipulates that income earned by commercial banks on debt secured by bonds must attract the Corporation Tax rate of 45% interest and not the Withholding Tax rate of 20%.

Sharma said that this move, effective from September 1, 2003, made it no longer feasible for any bank to participate in bond financing at the special rates offered to companies before the amendment.

According to Sharma, the bank began participating in bond financing to manufacturing companies in order for them to improve their investment and productive efficiency. He added that with bond financing, a company issues a debt instrument in the form of a bond, which is purchased by investors on the financial market.

He said that before September 1, the Income Tax Act allowed companies to raise capital through bonds with the proviso that the interest income earned by the investors would be free of corporation taxes, thereby enabling the bank to provide financing at rates below the short-term lending rate. “It is our view that this provision was instituted in order to provide the opportunity for companies to raise the capital required for long-term investment projects,” he said.

Sharma noted too that such debt financing had been used successfully in other countries to spur the development of the money and capital markets, adding that the commercial banking sector should participate on a level playing field with other investors. “In the Caribbean and North America there exists a fully developed capital market [from] which businessmen can choose [an array] of financial solutions...including venture capital, bond financing, equity participation etc,” Sharma said. He made the point that the establishment of the stock exchange was a step in the right direction, but the low volume of trading reflected the nature of the business community in Guyana. Sharma said appropriate incentives were needed to encourage the formation of public companies which could use the stock market to raise low-cost capital for investment.

As a result of the Fiscal Enactments Amendment Act, Guyana may have inadvertently subdued the development of the capital market, he suggested.

In the absence of a vibrant capital market, commercial banks have had to play an important financing role, Sharma said. He noted that because of the short-term nature of traditional borrowing, it carried a higher cost and therefore was unsuitable for the financing of capital investment of a long-term nature.

Sharma said one factor affecting profitability in business enterprise in Guyana was the cost of financing production and output compounded by small markets and external competitive pressures. “While over the years we have seen a decline in the commercial bank lending rate from 33% to 18%, it must be recognised that the interest rate is not only a function of the direct cost of funds, but is linked to the state of the money and capital market...it is also supported through institutional mechanisms such as the legal system, tax laws, companies legislation etc...,” Sharma said.

Dr Graham Scott, Managing Director of the Guyana Americas Merchant Bank, had told Stabroek News in an earlier interview that the largest capital market lay with the banking sector and that the provision of the Act was a major negative for the development of that market. He had made the point that to have a buoyant stock market there needed to be a vibrant debt market.

At the ceremony, Sharma did commend the recent government initiatives to establish a Commercial Court and the Alternative Dispute Resolu-tion Mechanism (ADRM). “...These will have the effect of forcing persons to be more responsible in their banking and commercial transactions”, he said.