ECC okays tax concessions to attract hot money

Govt aims to lure foreign money in a bid to inflate foreign currency reserves

ISLAMABAD: In its pursuit for risky hot foreign money to inflate foreign currency reserves, Pakistan approved sweeping tax concessions for non-resident companies on Wednesday to attract their investments in the government debt.

On the recommendation of the State Bank of Pakistan (SBP), the Economic Coordination Committee (ECC) of the Cabinet “approved proposals for simplification of tax regime for non-resident companies investing in the local debt market with a view to deepening the country’s capital markets”, according to a handout issued by the finance ministry.

The changes have been made to facilitate some foreign commercial banks, mainly Citi Bank, to invest in the government’s securities. These banks had also invested in the Egyptian government debt when SBP Governor Dr Reza Baqir was the country head of the International Monetary Fund (IMF) in Egypt.

Some of these changes will require legal amendments in the Income Tax Ordinance 2001 and these will be vetted by the Cabinet Committee on Legislative Changes.

The government has approved to cut withholding tax rate from 30% to 10% for non-resident companies having no permanent business establishment in Pakistan, being charged on the profit made on disposal of the securities, according to the decision. The 10% tax will be treated as final liability of the foreign company.   These foreign companies will be given special treatment on their investments in treasury bills and Pakistan Investment Bonds acquired through Special Convertible Rupee Accounts.

The finance ministry said that the new tax regime as approved by the ECC would apply to the non-resident companies having no permanent presence in Pakistan. The government remains the largest borrower due to a yawning budget deficit that in the last fiscal year hit a new record of Rs3.444 trillion. The IMF has already slapped a complete ban on the government’s borrowings from the central bank, which means all financing needs will be met by commercial banks and foreign companies.

The government has also approved to abolish the 100% penalty, which is meant for non-filers, on these foreign companies. These foreign companies will also be exempted from 0.6% banking transactions tax. The foreign companies will not be liable to pay advance income tax and these have been exempted from filing income tax returns.

The step has been taken to attract the hot foreign money, which the central bank government wants to lure to inflate the official foreign currency reserves, currently standing at $8.27 billion. The SBP governor has already taken an aggressive monetary stance by raising the key interest rates to 13.25%, which is 5.05% higher than the core inflation rate of August. The high interest rate is also meant to chase foreign money.

However, the hot foreign money starts flying out once the interest rates are brought down, which exposes the country to additional external sector risks.

In the second last monetary policy minutes, the SBP noted that relatively larger monetary tightening was aimed at uncovering interest rate parity viz-a-viz US economy.

The central bank governor has also floated another proposal of launching a new US dollar-based saving scheme, which will entitle people to claim profits and encash saving instruments at future exchange rates. The experts have said that this move could further weaken people’s trust in local currency.

Other decisions

The ECC also approved payment of outstanding amount of Rs5.85 billion as gas subsidy to the fertiliser industry. The ECC doled out the money to the fertiliser companies despite the fact that these firms have withheld billions of rupees of the government that they recovered from the farmers on account of GIDC but did not deposit in the kitty.

The ECC was also briefed on the wheat situation in the country and it was pointed out that while prices were stable in the most parts of the country, there were certain areas and places such as Karachi where the wheat and flour prices had escalated. The ECC directed the Ministry of National Food Security and Research to sit down with all stakeholders and ensure that the situation does not get out of hands and supply of wheat and flour at regular prices is ensured.

The ECC deferred a proposal to waive off special electricity charges against the industrial consumers. On a summary of the Ministry of Energy, the ECC considered to write off the financial cost surcharge, Neelum-Jhelum Surcharge, taxes and positive fuel adjustments only for the industrial consumers.

The proposal was that the federal government should pay this cost from the budget and should not burden the industrial consumers.

“The committee discussed the pros and cons of the proposal in view of its financial implications and asked the Finance Division to hold a meeting with the stakeholders, including the Power Division, Commerce Division and Industries & Production Division and resubmit the case to ECC with solid proposals,” according to the finance ministry.  The ECC also took up a proposal for extension and rehabilitation of gas network in the oil and gas producing districts of Khyber-Pakhtunkhwa and referred the matter to the Development Working Party headed by the petroleum secretary for an appropriate decision.

Published in The Express Tribune, September 5^th, 2019.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.