The income of foreign lenders has been taxed by the Federal Board of Revenue (FBR), a move that the Ministry of Economic Affairs said may cause “serious repercussions.” Foreign lenders earn the income by giving Pakistan loans and imposing taxes on their grants. As a result, Western countries have taken up the issue.
Humair Karim, Ministry of Economic Affairs Additional Secretary, disclosed it during a meeting of the Senate Standing Committee on Finance to discuss the new Finance Bill. It was chaired by Senator Saleem Mandviwalla.
According to the economic affairs ministry, the issue of taxation was raised with the Pakistani authorities by the UK, the US, Germany, Denmark and Japan.
To the committee’s surprise, the additional secretary revealed that recipients of interest on foreign loans have been taxed at very high rates, adding that “the FBR has not accepted our proposals to exempt the loans and grants from taxes.”
The Committee members told the ministry to resolve the issue at the government level instead of bringing it to parliament.
A paper submitted by the additional secretary to the standing committee noted, “In a debt-laden economy like Pakistan, this will cause serious repercussions and this must be addressed by the Finance and FBR.”
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According to Express Tribune, Pakistan owes international creditors about $128 billion while receiving about half a billion dollars in grants every year. The multilateral creditors under various agreements are exempt from taxes.
Afaq Qureshi, FBR’s Member Inland Revenue Policy, told the committee that an amendment had been proposed to give tax exemption on a case-to-case basis in the new Finance Bill.
According to an FBR official, the authorities had not directly taxed the interest income of a foreign country; it had taxed only that portion of the loan or grant that was in the hands of local contractors.
According to their agreement on technical cooperation, the economic affairs ministry said Pakistan and Germany had agreed that all grant agreements by Germany would be exempt from all general sales taxes, according to their agreement on technical cooperation in 1972.
Similarly, the UK has requested that the Official Development Assistance (ODA) grant financing and shall be exempted from all taxes and duties in all forms.
The USAID has also demanded that any taxes deducted on grant assistance would be deducted from the grant money. It urged the economic affairs ministry to process tax exemptions for the USAID’s implementing partners.
Due to this stance, the income of Denmark’s Danske Bank, Japan’s JIBC, Germany’s KfW, and France’s AFD will be taxed in Pakistan, the ministry said.