The government provides tax breaks to international investors.
exempts them from paying taxes on profits made through T-bill and PIB investments.
KARACHI:
The government has exempted non-resident banking companies from paying taxes on earnings made through investments in debt instruments like treasury bills (T-bills) and Pakistan Investment Bonds in order to entice international investment and increase State Bank’s foreign currency reserves (PIBs).
“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 Wednesday, February 22.
The government has modified the seventh schedule of the 2001 Income Tax Ordinance, according to the notification.
It has been learned that non-resident businesses were required to withhold 10% of capital gains made from the sale of debt instruments and government securities through the SCRA (Special Convertible Rupee Account) and RDA (Roshan Digital Account) operated by the central bank.
Remember that for about two years, the administration of previous prime minister Imran Khan attracted over $3.5 billion in foreign investment into rupee-denominated debt products such as T-bills and PIBs (2019-2020). It accomplished this by lowering regulations and providing tax advantages for all forms of foreign investment.
To deal with the Covid-19 pandemic, investors aggressively withdrew practically the whole investment in a short period of time in 2020.
The high rate of return on T-bills and PIBs, which was then at roughly 14–15%, as opposed to the nominal return on investment in industrialised countries, which was in the range of 0.25–0.5%, was the key to luring in international investment.
In addition, the rupee-dollar exchange rate was steady, which in the past attracted international investment as well.
The rate of return on T-bills (with terms ranging from three to twelve months) has reached a fresh record high today of 20%. Also expected to stabilise at approximately 260/$ is the rupee.
Yet, despite an increase in the rate of return, Ismail Iqbal Securities Head of Research Fahad Rauf thought that this time the government might not be successful in luring large quantities of foreign investment to debt instruments.
“The government may hardly attract a few hundred million dollars through the latest tax concession to foreign banking companies … amid poor circumstances,” he said.
Rauf pointed out that the country’s foreign credit rating had been much better in 2019-20 compared to today’s downgraded ratings.
Moreover, the state of economy has worsened compared to stable growth in the past. “We are managing the high risk of default these days unlike the better investment environment in the past.”
He was of the view that if foreign investors developed confidence in the economy, then they may invest in Pakistan’s foreign currency-denominated bonds like Eurobond and Sukuk in the global market instead of injecting funds into rupee-denominated T-bills and PIBs.
Rauf cautioned that there still existed the risk of rupee depreciating further against the dollar.
He emphasised that such symbolic activities (like tax incentives) would not help the government revive foreign investor confidence in the economy and its investment securities.
Instead, the government should take solid measures like economic reforms and structural changes to fix the faltering economy to win investor confidence.
