The federal cabinet has waived off 15% income tax on profit that foreign banks are earning on lending about $2.5 billion to Pakistan, media sources have reported. The loans had been acquired on short-term basis November 2013 and September 2016 to support its foreign exchange reserves. The government had acquired these loans after its failure to enhance exports and foreign direct investment for meeting its external financing requirements.
The summary to exempt 15% tax on interest income applies to following banks namely Credit Suisse AG, United Bank Limited, Allied Bank Limited, Noor Bank of UAE, Standard Chartered, Dubai Islamic Bank and China Development Bank.
The decision to forgo the tax was taken by the federal cabinet in February bypassing the National Assembly. Earlier, the decision of the cabinet had raised transparency issues because the loans had been approved bypassing the competitive process.
The move to waive off tax was aimed at making a claim that the government obtained these loans at below 5% interest rate in dollar terms. By including the 15% tax, the rate could have been higher than 5%.
The Federal Board of Revenue (FBR) spokesman Dr Mohammad Iqbal stated that the precise effect of the tax loss to various foreign banks could not be stated due to the applicability of double taxation treaties.
The loans had been obtained at interest rates up to 4.71% in dollar terms. Most of these loans were obtained on London Interbank Offered Rate (Libor) of three-month floating average plus 4%.
At the start of 2017, the average three-month Libor interest rate has crossed 1% level. This has increased the cost of borrowing for Pakistan.
The federal cabinet’s decision would directly benefit the banks that are earning over 4.5% interest rate in times when borrowing costs remain low due to low-interest rates.
The Ministry of Finance informed the federal cabinet that the official documents revealed that that ‘foreign commercial loans are offered with the condition that taxes applicable in Pakistan would not be borne by the lenders.’
The current account deficit continues to widen reaching $4.7 billion in first seven months of the ongoing fiscal year. China-Pakistan Economic Corridor-related imports, decline in exports and a decrease in the flow of remittances have all contributed to the widening of the gap.
The trade deficit gap has peaked to an alarming high of $20.2 billion during July-February.