NBR exempts withholding tax on interest payment of foreign loan

The National Board of Revenue (NBR) has provided exemption to the withholding tax on the interest earnings of foreign lenders who are lending to local firms for three months, according to a notification.

The tax administration provided the exemption until February 28 next year, attaching some conditions, according to a notice issued yesterday.

The development comes after the Foreign Investors' Chamber of Commerce & Industry (FICCI) urged the NBR to withdraw the 20 percent withholding tax imposed from the fiscal year 2023-24.

An NBR official said the withholding tax was imposed on the interest income of foreign lenders.

The exemption has been giver for a certain period so that local borrowers can resettle terms with lenders through negotiations, he said.

FICCI President Naser Ezaz Bijoy said the apex body of foreign investors submitted a few proposals, including the recommendation to withdraw this withholding tax.

He said the decision to impose the tax would adversely impact the deficit in the country's financial account, which is already observing lower foreign loans due to higher Secured Overnight Financing Rate (SOFR).

The SOFR is a benchmark interest rate for dollar-denominated derivatives and loans.

He said an additional 20 percent withholding tax on gross interest would further discourage borrowers to avail foreign loans, thus adversely impacting the forex reserve.

"Moreover, additional costs will be passed on to consumers as many of the essential commodities are imported," he said.

"Given the notification allows time till February 2024, the NBR and private sector should consult each other to reach a resolution urgently and avoid any adverse impact for the nation's economy," he said.

Snehasish Barua, a partner at Snehasish Mahmud & Co, a chartered accountancy firm, said the withholding tax was exempted since 1976.

It was removed from the current fiscal year. In future, if the tax authority wants to discontinue any such benefit, it should give time to taxpayers to prepare, he said.