Currency dealers oppose 16% FED

Say move will lead to further rupee depreciation, encourage illegal trade

KARACHI:

Currency dealers have invited the finance minister’s intervention for the withdrawal of notices issued by the Federal Board of Revenue (FBR).

They cautioned that if the directive to charge 16% federal excise duty (FED) on currency exchange was implemented, the rupee would dive to 200 against the US dollar, thus encouraging illegal trade.

“FBR has been harassing exchange companies by sending illegal notices for quite some time,” Exchange Companies Association of Pakistan (ECAP) President Malik Bostan wrote in a letter to Finance Minister Shaukat Tarin.

If forex companies “start charging 16% FED on the exchange of currencies and processing workers’ remittances, then no one would choose to buy or sell currencies through them,” he said, adding that people would stop sending remittances through the exchange companies.

“The entire foreign exchange business will relocate and operate through the illegal Hawala/ Hundi operators and black market,” he cautioned and added that this would take the rupee down, beyond Rs200 against the US dollar.

The rupee is hovering around Rs177 in the inter-bank market these days. It is expected to recover in the short run to around Rs175-176, and to remain stable at around Rs178 by the end of June 2022.

The FBR has directed to charge customers 16% FED on the exchange of foreign currencies. “The federal government used to charge FED on services, but now provincial governments collect the tax under the 18th Amendment,” Bostan pointed out.

“The exchange companies, which deal in buying and selling of foreign currencies, do not come under the services sector,” he said.

“Exchange companies pay 29% income tax on profits they earn through buying and selling currencies,” he added.

He recalled that the federal government, provincial governments and FBR withdrew the FED and sales tax on currency exchange eight years ago in 2014.

Now, “once again implementing the tax (16% FED) is a plot against the government”, he said, emphasising the need to stop the FBR from sending such illegal notices.

Besides, the FBR field formation officers were demanding that the exchange companies submit withholding tax (WHT), which was supposed to be collected on outward remittances made through the global foreign exchange processing company (Western Union), he highlighted.

He maintained that the State Bank of Pakistan (SBP) had allowed the exchange companies to use up to 20% of inward remittances for outward remittances through Western Union, which is an Irish firm.

“Pakistan and Ireland have entered into double taxation agreements, while there is no permanent establishment of Western Union in Pakistan,” Bostan said, adding “no withholding tax is generated in light of the double taxation agreement and other related laws”.

However, the field formation officers had issued notices demanding income tax along with a fine (surcharge), “which is illegal”, he said.

If the FBR collects WHT on outward remittances through Western Union, in violation of the double taxation treaty, then “this may result in devaluation of the rupee by 25-30%, recovery of which would be impossible”, he said.

In another development, the FBR has proposed to install points of sale (POS) at all branches of exchange companies operating throughout the country to document foreign currencies’ sale and purchase at retail level.

“We welcome the development,” Exchange Companies Association of Pakistan (ECAP) Secretary General Zafar Paracha said, adding that “we are already documenting the transactions, since we buy and sell foreign currencies through biometric procedure”.

Published in The Express Tribune, January 20^th, 2022.

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