No tax on foreign loan interest till February: NBR
The National Board of Revenue (NBR) has announced that the 20% tax imposed on the interest of foreign loans taken by businesses will not be applicable till February 2024.
According to a gazette notification issued by the NBR yesterday, the exemption will not be applicable in case of advance payment of loan interest.
Businesses said the tax exemption will reduce their interest cost by 1.5%-2%.
Industry stakeholders have welcomed the NBR's decision but they have expressed concern about a potential surge in foreign loan payments before the deadline to avoid taxes.
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 Secured Overnight Financing Rate 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 current budget on interest payments has made foreign loans costlier. The cost of borrowing was shot up to around 11%.
In the fiscal year 2023-24 budget, the NBR had initially imposed a 20% tax on interest payments for foreign loans from July. The objective was to curb foreign loan borrowing by both banks and businesses. 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 told The Business Standard, "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."