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Foreign Investors Offered Tax Relief From Pakistan Govt

BUSINESS:The government has exempted non-resident banking companies from paying taxes on profit earned through investments in debt securities such as treasury bills (T-bills) and Pakistan Investment Bonds (PIBs) in an effort to increase State Bank’s foreign currency reserves and attract foreign investment.

“profit on debt and capital gains from debt and debt instruments approved by the federal government shall be exempt from tax chargeable…, derived by any non-resident banking company approved by the federal government,” the Ministry of Finance and Revenue stated in a notification on February 22.

The government has altered the Seventh Schedule of the Income Tax Ordinance, 2001, as stated in the notification.

It has been learned that non-resident businesses had to pay 10% withholding tax (WHT) on capital gains from selling debt instruments and government securities through the SCRA (Special Convertible Rupee Account) and RDA (Roshan Digital Account), which were run by the central bank.Read More..

You may recall that the rupee-denominated debt securities known as T-bills and PIBs, issued by the government of the former prime minister Imran Khan, attracted foreign investment totaling more than $3.5 billion for almost two years (2019-2020). It did this by easing regulations and offering tax breaks to all kinds of foreign investment.

To deal with the Covid-19 pandemic, investors, on the other hand, aggressively pulled out almost the entire investment in a few months in 2020.

The high rate of return on T-bills and PIBs, which was between 14 and 15 percent at the time, compared to the nominal return on investment in developed nations, which was between 0.2 and 0.5 percent, was the key to attracting foreign investment.

In addition, the steady exchange rate between the rupee and the dollar contributed to the attraction of foreign investment in previous years.

The three- to 12-month T-bill rate of return has reached a new all-time high of 20% today. Ismail Iqbal Securities Head of Research Fahad Rauf, on the other hand, believed that despite a rise in the rate of return, the government may not be able to attract significant amounts of foreign investment into debt instruments this time around. The rupee is also expected to stabilize around 260/$.

He stated, “In these difficult times, the government may hardly attract a few hundred million dollars through the latest tax concession to foreign banking companies.”

Rauf said that the country’s foreign credit rating had been much better in 2019 and 2020 than it is now, compared to the ratings that have been downgraded.

In addition, the economic situation has deteriorated in comparison to stable growth in the past. In contrast to the favorable investment climate of the past, we are managing the high risk of default in these days.

He was of the opinion that rather than injecting funds into rupee-denominated T-bills and PIBs, foreign investors could invest in Pakistan’s foreign currency-denominated bonds like Eurobond and Sukuk on the global market if they gained confidence in the economy.

Rauf warned that the rupee’s continued depreciation against the dollar remained a possibility.

He emphasized that the government would not be able to restore foreign investor confidence in the economy and investment securities through symbolic actions like tax incentives.

Instead, in order to restore investor confidence, the government ought to implement solid measures, such as structural changes and economic reforms.

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