The revenue board is considering the move to provide support to businesses amid the dollar crisis
The National Board of Revenue (NBR) is considering extending the tax exemption on foreign loan interest payments from February 2024 to December 2024.
In a circular on 28 November, the NBR exempted 20% tax on interest payment of foreign loans until 28 February 2024.
It is now considering extending the exemption to December 2024 in order to provide support to businesses that are struggling in the current economic situation amid the dollar crisis, said officials concerned.
The revenue board is going to issue an order soon on the extension of the tax exemption, they said.
“This is a direct subsidy from the government to foreign loan borrowers,” a senior NBR tax official, who preferred not to be named, told The Business Standard. “This will allow businesses to borrow foreign currency without hesitation for the next year.”
Experts have welcomed the NBR’s plan. Syed Mahbubur Rahman, managing director and chief executive officer of Mutual Trust Bank, told, “The previous exemption, which was for only three months, was not very beneficial. Only businesses that had loan repayments due during that time would have benefited. If the tax exemption is extended for one year, it will provide some relief in terms of paying foreign loan interest.”
This could have a positive impact on financial accounts, he added.
The interest rates in the international market are now linked to the US Federal Reserve’s policy rate named 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 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 (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 was shot up to around 11%.
In the budget for the fiscal 2023-24, the NBR initially imposed a 20% tax on interest payments for foreign loans from 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, the 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, “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.”
