No tax exemption on foreign loan interest post-Dec: NBR

• NBR imposed 20% tax on interest payments for foreign loans from July 2023
• Businesses became less inclined to take on new loans, leading to a decline in short-term foreign loans
• They focused on repaying existing loans, which impacted the country's reserves
• NBR granted the tax exemption until February 2024, later extended until 31 December

The exemption of tax on interest payments for foreign loans taken by businesses will not be extended beyond December, National Board of Revenue Chairman Abu Hena Md Rahmatul Muneem has said.

"We have given you breathing space. But after December, the facility will not exist. Start negotiations [with your foreign lenders] that way," he said at a pre-budget discussion at NBR headquarters in the capital on Thursday, urging businesspeople who usually take short-term foreign loans to prepare from now on.

At the meeting organised by NBR in view of the national budget for the fiscal 2024-25, Muneem asked entrepreneurs not to propose extending the tax exemption after December, saying, "We cannot be a tax haven because we are now moving towards acquiring the position of a developing country."

In the fiscal 2023-24 budget, the NBR imposed a 20% tax on interest payments for foreign loans from July last year. 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.

This tax mainly applies to offshore banks that charge interest, and therefore its burden should not be imposed on their local borrowers. However, bank sources have stated that foreign lenders have begun indirectly passing these losses on to local borrowers.

In response to this situation, the country's banking sector, including the Bangladesh Bank, initiated negotiations with the NBR. Initially, the revenue board granted exemption from the tax until February this year. Later, the exemption facility was extended until 31 December. NBR sources say the extension was aimed at encouraging an increased dollar flow.

During the discussion, the NBR chairman attributed weaknesses in negotiations to the burden of tax on loan interest on borrowers.

"We have double taxation avoidance agreements with almost all the countries from which we borrow. As a result, taxes paid here do not have to be paid in those countries again," he asserted.

"But these things cannot be negotiated properly from our side," he noted.

According to the central bank, short-term private sector foreign debt stood at $12.13 billion at the end of October last year, down from $13.66 billion at the end of June.

At the meeting, the Bangladesh Export Processing Zones Authority (Bepza) sought various types of tax benefits.

In response, the NBR chairman highlighted the issue of misuse of facilities given to industries under Bepza and the Bangladesh Economic Zones Authority (Beza), saying, "We are told that there will be no misuse. But when there is evidence of misuse, it becomes heart-breaking."

"We can't take more risk by extending additional facilities," he added.

At the meeting, representatives of some organisations, including Business Initiative Leading Development (BUILD) and the Bangladesh Hi-Tech Park Authority, presented their proposals.

At a separate meeting on the same day, the Bangladesh China Chamber of Commerce and Industry (BCCCI), the India Bangladesh Chamber of Commerce and Industry, the Women Entrepreneurs Network for Development Association, the Anti-Tobacco Media Alliance (ATMA), and some other organisations presented their proposals for inclusion in the upcoming budget.

BCCCI Adviser Khorshed Alam proposed reducing Advance Income Tax (AIT) from 2% to 0.25% beyond the value-added tax (VAT) of Tk3 per kg on yarn sales locally.

In addition, the same organisation also sought NBR initiatives to keep a 50% tax difference in the sale of Complete Knock-Down (CKD) and Completely Built Units (CBU), to review the CKD policy, and to encourage electric vehicles.

ATMA proposes increasing the price level of various types of tobacco products and increasing duty, through which it is said that an additional revenue of Tk9,400 crore can be collected