Govt offers tax relief to foreign investors
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To attract foreign investment and boost State Bank’s foreign currency reserves, the government has exempted non-resident banking companies from paying taxes on profit earned through investment in debt securities like treasury bills (T-bills) and Pakistan Investment Bonds (PIBs).
The Ministry of Finance and Revenue said in a notification on Wednesday (February 22) “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.”
According to the notification, the government has amended Seventh Schedule of the Income Tax Ordinance, 2001.
Non-resident companies were subject to 10% withholding tax (WHT) on capital gains arising from the disposal of debt instruments and government securities through the central bank-run SCRA (Special Convertible Rupee Account) and RDA (Roshan Digital Account), it has been learnt.
To recall, the government of former prime minister Imran Khan had attracted foreign investment of over $3.5 billion in the rupee-denominated debt securities, T-bills and PIBs, for almost two years (2019-2020). It did so by giving tax incentives to all types of foreign investment and relaxing rules.
Investors, however, aggressively pulled out almost the entire investment in a few months in 2020 to cope with the Covid-19 pandemic.
The key to attracting foreign investment was the high rate of return on T-bills and PIBs, then at around 14-15%, compared to the nominal return on investment in the range of 0.25-0.5% in developed countries.
Moreover, the rupee-dollar exchange rate was stable, which was another factor behind attracting foreign investment in previous years.
Today, the rate of return on T-bills (of three months to 12 months) has risen to a new all-time high of 20%. The rupee is also poised to stabilise around 260/$.
Ismail Iqbal Securities Head of Research Fahad Rauf, however, believed that this time around the government may not succeed in attracting foreign investment to debt instruments in big amounts despite a surge in the rate of return.
“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.
Published in The Express Tribune, February 26th, 2023.
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