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Untangling the Golden Key web

2013 Jul 21

Given the thousands who held deposits in the failed Golden Key credit card company, and the size of its deposit fund of many billion rupees, it is no surprise that the state of play in the protracted litigation and other efforts to sort the mess remains in the news. Chief Justice Mohan Pieris, presiding over a three-judge bench hearing a fundamental rights action filed by some depositors, was reported to have remarked last week that the depositors should be grateful for the efforts of the courts to formulate a scheme to give them some redress especially in the context of the fact that no taxes on the interest earned on the Rs. 26 billion deposit fund had been paid.

It is no secret that thousands of gullible investors, attracted by the unrealistically high interest rates offered and paid by Golden Key, paid no taxes on the interest payments they received when the going was good. The company was not an authorized deposit taker regulated by the Central Bank the way it regulates licensed commercial banks and other deposit takers like registered finance companies. The failed company accepted deposits as a consideration for the issue of credit cards and described what it was paying investors as ``rebates’’ rather than interest. Given that its operation was huge and that the nature of its business was common public knowledge, there was an obvious regulatory failure in that the concerned authority, that is the Central Bank, did not closely examine what was happening until the bubble burst.

The contention that the company did not come under the ambit of the existing laws is hardly an excuse for the Central Bank not taking an interest in the business. Wisdom has dawned after the collapse and the bank regularly publishes public notices listing the licensed deposit takers. Maybe such notices had been published earlier too, though less frequently, but those attracted by the way-above-market interest rates had clearly taken little notice of cautionary publications. Up to now nobody has authoritatively revealed how and why the collapse was triggered. Probably accurate market talk has it that a couple of very large withdrawals created a situation where a pyramid like scheme that seemed to have been borrowing from Peter to pay Paul was confronted with a cash crunch that made it impossible to meet its interest and repayment obligations. As the word got around, there was a natural run on deposits and the smelly stuff hit the fan.

Withholding taxes on interest and dividend income is a convenient method for the State to collect its dues on such earnings. In the case of interest income, declarations made to the deposit taker by the investor will determine what percentage of such earnings will be deducted and remitted to the Department of Inland Revenue. If the depositor is not liable to pay income tax with an income below a specified floor, based on a declaration he/she would make to the deposit taker, there is no deduction. The highest deduction currently made from those with relatively high incomes is eight percent, reduced from the 10 percent that was previously applied. Those with less income would pay lower rates on a sliding scale. Nobody likes to pay taxes they can avoid and it is quite obvious that many declarations that are made may not be true. Given that the Inland Revenue authorities do not dig into the truth or otherwise of such declarations, it would appear that the amount of taxes foregone is not worth the effort and expense of tracing them. As it is, the number of personal income tax files maintained by the department is much fewer than they should be judging by the affluent lifestyles very visible in the country. The strategy of broadening the tax base by reducing the rates does not appear to have worked in the way those who devised it wished.

In the case of Golden Key, hopefully the tax authorities have made sure that at least the large deposit holders have rendered unto Caesar the things that are Caesar’s. If not, it is imperative that assessment notices are served and dues recovered whoever the defaulters are and whatever their positions. Small depositors who have tried to meet an ever rising cost of living by seeking the high interest the company offered must be given any possible redress. There are those who berate them saying they greedily sought unrealistically high interest and must now pay the price of their avarice. While that may be true of the rich, such as those who are supposed to have withdrawn their hundreds of millions in the nick of time triggering the collapse, it would be too harsh a judgment on the small people who, quite apart from the interest foregone on their savings, are not expected to recover more than 40 percent of their investment. Given the interlinked companies of the business group of which Golden Key was a single unit, and the way in which funds raised by that company had been funneled into other group companies, untangling the web is obviously a gigantic task. Added to that is the fact that shareholders far removed from the scam would also have interests in group assets that cannot therefore be totally stripped to help meet obligations of the liable entity.

There are those who have lost money in Golden Key who feel aggrieved that the Central Bank bailed out previously failed finance companies like Mercantile Credit and HPT and their depositors were repaid. We are not aware whether this was done only with the resources of those companies themselves or at least partly with public funds. But these were regulated licensed deposit takers. In the case of Mercantile Credit, much of the losses incurred were during the management by state agencies and the previous owners have washed their hands of such losses. The Central Bank has the responsibility of ensuring the stability of the financial system and it did well in preventing a run on the banks, especially the connected Seylan Bank, after Golden Key’s debacle. This, of course would be of little consolation to those depositors who feel inequitably treated. However that be, it is clear that both the courts and the Central Bank are trying their best to enable whatever redress is possible. Hopefully this task would be completed sooner than later.

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