Govt may lift 20% source tax on foreign loan interest

Highlights:

• The central bank and business groups said the tax increases foreign borrowing costs by 25%
• NBR officials said the tax may be withdrawn for the next six to nine months, on some conditions
• A SRO will be issued soon after the finance minister's approval
• Bangladesh's gross external debt stood at $96.24 billion in December 2022

The government may withdraw the 20% source tax on the interest against foreign loans, which was imposed in the national budget for FY24, according to finance ministry officials.

They said the ministry is considering withdrawing the newly imposed source tax following requests from the central bank and numerous business groups, who argue that the tax would increase foreign borrowing costs by about 25%.

A senior official of the National Board of Revenue (NBR), speaking on condition of anonymity, acknowledged that they had prepared a summary on the foreign loan interest tax and sent it to Finance Minister AHM Mustafa Kamal on Thursday.

"Based on some conditions, the withdrawal of the tax would be considered for the next six to nine months, subject to the finance minister's approval," the official told The Business Standard.

NBR sources said a Statutory Regulatory Order (SRO) will be issued soon after the finance minister's approval.

Businessmen welcomed the move, but they also said it would be unwise to impose a time limit for withdrawal, as most foreign loans are long-term.

Viyellatex Group Chairman and CEO KM Rezaul Hasanat said that repaying foreign loans within a time frame is often not possible, as foreign lenders typically include clauses to protect their cash flow. He added that lenders may impose a penalty on borrowers who seek early settlement.

"Besides, during such an economic time, no local entity will be able to arrange funds to repay their lenders. How will five years of payments be arranged in such a short time?" said Hasanat, adding that Bangladeshi entrepreneurs take loans from foreign sources because dollars are not readily available in the country.

The NBR official, however, said withdrawing the source tax was considered for a certain period at the request of the central bank and Association of Bankers, Bangladesh (ABB) to maintain liquidity flow stability and reduce pressure on currency exchange rates.

The Bangladesh Bank introduced Offshore Banking Units (OBUs) in 1985 to provide financing opportunities to Export Processing Zones (EPZs) and to popularise foreign currency financing. Foreign loan interest was exempted from source tax under some conditions, but this benefit was removed by the Income Tax Act 2023, he said.

Earlier, in a letter to the NBR, the central bank said the interest rates on foreign loans have already reached their peak, and the newly imposed source tax only serves to make these loans even costlier. Ultimately, it is the borrowers who will bear these additional costs induced by the source tax, not the foreign lenders.

"This could lead to discouragement in taking foreign loans by offshore banking units, corporates, and importers, which, in turn, could exert pressure on liquidity and the exchange rate," reads the BB letter.

Before that, in a letter to the central bank, ABB Chairman Selim Reza Farhad Hussain also requested the central bank governor to take steps to withdraw this source tax. A copy of that letter was also sent to the finance ministry.

According to central bank data, Bangladesh's gross external debt stood at $96.24 billion in December 2022, of which $24.3 billion was owed by the private sector, including over $11.15 billion in short-term trade credit.