Tax exemption on foreign loan interest extended till Dec
The country’s revenue authority made the extension effective by issuing a statutory regulatory order (SRO) on Tuesday (9 January)
The National Board of Revenue (NBR) has extended the exemption of tax on interest payments for foreign loans until December this year to support businesses grappling with the current economic situation amid the dollar crisis.
The country's revenue authority made the extension effective by issuing a statutory regulatory order (SRO) on Tuesday (9 January).
In an earlier SRO issued on 28 November last year, the NBR had exempted the 20% tax until 28 February 2024.
"This is a direct subsidy from the government to foreign loan borrowers," said a senior tax official in December last year when the NBR's tax department was working on the new order.
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"This will allow businesses to borrow foreign currency without hesitation for the next year," he told The Business Standard.
Experts have welcomed the new SRO.
The interest rates in the international market are now linked to the US Federal Reserve's policy rate, the Secured Overnight Financing Rate (SOFR), instead of the formerly London Interbank Offer Rate (LIBOR).
The SOFR already surged to 5.35% from as low as 0.25% during the Covid-19 pandemic and was below 1% even in early 2022. Consequently, the interest rates for loans on the international market have experienced a corresponding spike. Foreign loans are subject to an added interest rate (margin) of up to 3.5%.
Along with the rise of the global interest rate, a 20% "withholding tax" imposed in the last budget on interest payments has made foreign loans costlier. The cost of borrowing shot up to around 11%.
In the budget for fiscal 2023-24, the NBR initially imposed a 20% tax on interest payments for foreign loans starting in July. Consequently, businesses became less inclined to take on new loans, leading to a decline in short-term foreign loans. Instead, businesses focused on repaying existing loans, contributing to a reduction in the country's forex reserves.
According to the central bank, short-term private sector foreign debt stood at $12.13 billion at the end of October. It was $13.66 billion at the end of June.
A senior central bank official earlier told TBS, "In the past few months, we have experienced a significant decline in our forex reserves. One of the reasons for this is the reduction in short-term foreign loans in the private sector."
