Ex-post facto approval given: $4bn foreign commercial loans exempted from tax

ISLAMABAD: The Federal Cabinet has granted ex-post facto approval to exempt foreign commercial loans of $ 4 billion from all types of taxes, official sources told Business Recorder.

Under the Rules of Business, 1973 Finance Division was responsible for arranging finances, including foreign exchange, to meet the current and development expenditure needs of the country and to maintain a sustainable balance of payments position.

Raising foreign exchange on commercial terms from the international financial market was one important avenue for this purpose. Commercial loan transactions were undertaken by Finance Division on a routine basis largely to maintain foreign exchange reserves and frequently involved refinancing of earlier availed facilities.

Govt took $1.596 billion foreign loans in July alone

The Cabinet in its meeting dated April l, 2021 granted ex-post facto approval to the commercial facilities availed by Finance Division from February to November 2020. From December 2020 to November 2021 Finance Division had executed the following; (i) Master Murabaha, Dubai Islamic Bank $ 420 million;(ii) Term Facility Agreement, Credit Suisse, $ 85 million; (iii) Term Facility Agreement, Industrial and Commercial Bank of China, $ 500 million; (iv) Term Facility Agreement, Industrial Bank of China $ 300 million;(iv) Extension Agreement, ECO Trade and Development Bank, $ 40 million;(vi) Master Murabaha Agreement, Ajman Bank, $ 350 million;(vii) Term Facility Agreement, China Development Bank, $ 1 billion;(viii) Trading Financing Documents, Standard Bank $ 800 million;(ix) Master Murabaha Agreement, Dubai Islamic Bank $ 215 million; and (x)Term Facility Agreement and Murabaha Agreement, Credit Suisse and Mashreq Bank $ 270.5 million. The total loans were $ 3.980.5 billion.

Rule 16(1) (d) of the Rules of Business, 1973 required placing of these loan agreements before the Cabinet for approval. Further these foreign commercial loans were offered on the condition that taxes applicable in Pakistan would not be borne by the lenders. The options available with the Government were to either bear the cost of these taxes or invoke exemption clause 75 of part I of the Second Schedule Income to the Tax Ordinance, 2001 which empowered the Federal Government to grant exemption on profit payments on the money borrowed under loan agreements.

According to sources, financing agreements were executed after clearance from the Ministry of Law & Justice and the office of Attorney General for Pakistan. The Federal Board of Revenue had no objection to the proposal for granting tax exemption in respect of interest/ profit payments on these foreign financing facilities.

Finance Division, sought approval of the Cabinet of Cabinet for the following proposals: (i) ex-post facto approval under Rule 16(1) (d) of the Rules of Business 1973 for foreign financing facilities; and (ii) granting tax exemption under Clause 25 of part I of the Second Schedule to the Income Tax Ordinance, 2001 on interest/profit payments accrued on these financing facilities.

Copyright Business Recorder, 2021