Govt may reimpose 20% tax on offshore loan interest

The government is considering reintroducing a 20% income tax on interest payments for offshore loans in the upcoming budget, according to officials at the National Board of Revenue.

The proposal may be included in the Finance Bill to be placed in June, officials said.

An offshore loan is a financing arrangement where a borrower secures funds from a lender located in a foreign country, typically through an offshore banking unit.

The tax was first introduced in the FY2023-24 budget. However, following pressure from bankers and businesses, the then government withdrew the decision and granted an exemption through a statutory regulatory order issued on 22 April 2024.

A senior NBR official involved in the budget process told The Business Standard on condition of anonymity that the proposal has already received approval from the finance minister.

"A tax on interest payments for foreign funds may be imposed again. It may be included in the proposed Finance Bill," the official said.

He added that the exemption was introduced at a time [FY2023-24] when Bangladesh was facing pressure on foreign exchange reserves and wanted to encourage inflows of overseas funds.

"The situation is different now," he said.

Experts say the tax should be reinstated to ensure fairness between local and foreign borrowing.

Snehasish Barua, a tax expert and managing director of SMAC Advisory Limited, told TBS that interest paid on local loans is already taxed, while offshore loan interest remains exempt.

"From an equity perspective, offshore loan interest should be taxed. Otherwise, it creates a disparity between local and foreign borrowing," he said.

He added that because Bangladesh has double taxation avoidance agreements with many countries, lenders can often adjust taxes paid in Bangladesh against tax liabilities in their own countries.

Business leaders and bankers, however, fear the move could increase borrowing costs and discourage foreign lenders.

MA Jabbar, managing director of the country's leading industrial business firm DBL Group, said lenders would likely raise interest rates if the tax is imposed. "As a result, project costs for businesses will increase. This tax should not be imposed," he told TBS.

DBL Group currently has nearly $200 million in offshore borrowing.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said the proposed tax could reduce the availability of foreign funds.

"If the tax is imposed, lenders may become less interested in providing loans. Even if they do lend, interest rates will rise," he said.

Industry insiders fear the move could make offshore borrowing more expensive at a time when businesses are already facing high financing costs.