Islamabad, 26 February 2023 (GNP): The Government of Pakistan has spared non-resident financial firms from tax payments on earnings made through investments in debt instruments such as treasury bills (T-bills) and Pakistan Investment Bonds to encourage international investment and increase State Bank’s foreign currency reserves (PIBs).
According to a notification released by the Ministry of Finance and Revenue on Wednesday, February 22, “profit on debt and capital gains from debt and debt securities approved by the federal government shall be exempt from tax chargeable obtained by any non-resident banking company endorsed by the federal government.”
The government has modified the seventh schedule of the 2001 Income Tax Ordinance, as per the declaration.
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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 the previous prime minister Imran Khan attracted over $3.5 billion in foreign investment into rupee-denominated debt products such as T-bills and PIBs (2019-2020). It was accomplished by lowering regulations and providing tax advantages for all forms of foreign direct investment.
To deal with the Covid-19 pandemic, investors aggressively withdrew practically the whole investment in a short period in 2020.
The high return rate on T-bills and PIBs, which was then at roughly 14–15%, as opposed to the nominal investment return in industrialized countries, which was in the range of 0.25–0.5%, was the goal of attracting international investment.
In addition, the rupee-dollar exchange rate was steady, which in the past attracted international investment as well.
The return rate on T-bills (with terms ranging from three to twelve months) has reached a fresh record high today of 20%. Further expected to stabilize at approximately 260/$ 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.
In light of the critical situation, he stated, “the government will hardly attract just a few hundred million dollars with the newest tax relief to foreign financial institutions.”
Rauf emphasized that the nation’s foreign credit rating had already been significantly better in 2019–20 compared to the ratings that are currently being reduced.
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In addition, the economy is in worse shape now than it was when it was experiencing stable growth. “Unlike the better investment climate of the past, we are handling the significant risk of default these days.”
He believed that if foreign investors acquired trust in the economy, they may invest in Pakistan’s foreign currency-denominated bonds, such as Eurobond and Sukuk, on the international market as opposed to putting money into T-bills and PIBs denominated in rupees.
He highlighted that the government would not be helped by such symbolic actions (like tax incentives) to restore foreign investor trust in the economy and its financial investments.
Conversely, to restore investor confidence in the market, the government should implement sound reforms including economic and structural reforms.
