EDITORIAL: Interestingly, the Federal Board of Revenue (FBR) seems to have quite an appetite for novelties; just not when it comes to traditional ways of expanding tax revenue. Its latest smart idea, according to a report in the press, was taxing incomes earned by Pakistan’s foreign lenders in addition to imposing taxes on their grants; despite the finance ministry’s scepticism and warnings that it could have “serious repercussions”.

Is it any surprise, then, that a number of foreign governments including the United States (US), United Kingdom (UK), Denmark and Japan have raised this issue with the Pakistani authorities? It’s not just the matter of taxing lenders in principle, which is troubling enough, but also that recipients of interest payments on foreign loans have been taxed at a rate high enough to even shock the finance ministry. “FBR has not accepted our proposals to exempt the loans and grants from taxes,” the additional secretary of the ministry of economic affairs told a meeting of the Senate Standing Committee on Finance the other day.

Let’s not forget that Pakistan owes roughly $138 billion to international creditors and receives about half a billion dollars in grants every year. International organisations like USAID, which do a lot of valuable work here, are understandably very upset about these taxes. USAID has in fact made it very clear that any taxes deducted from grant assistance would simply be deducted from the grant money. Others have expressed shock that Pakistan wants to tax markup paid by the government on repayments as income of the recipient country.

The finance ministry has already warned that “this kind of treatment can simply result in drying up of any foreign economic assistance from these countries”. Indeed, nobody in the FBR seems to have given much thought to the consequences in case their actions impact the flow of the loans and grants themselves. Why, after all, would anybody want to go through the trouble of lending money to a troubled country and then be taxed by that country for it? And if this was as pressing as the Board clearly thought, then it should at least have run something so sensitive by the finance ministry first.

One would think that there would be strict laws in place for just such things. If they do exist, and have been bypassed or ignored altogether, then other relevant laws should now take their course. And if they don’t, then they should be put in place very quickly. These are times when the government is bending over backwards, and breaking people’s backs with its policies, just to get the IMF (International Monetary Fund) to restart the bailout programme, which is only worth $6 billion in all. That should be enough to show that every penny that comes into the country counts and hounding institutions and governments that send them here is the last thing that we should even think of doing.

It’s understandable that FBR has proved so utterly ineffective at doing its main job that it is always looking for other ways to make up for chronic revenue shortfall. But it should know better than to poke its nose in business that could upset the country’s fragile credit supply. We are one of the world’s most indebted countries, also one of the poorest, with one of the highest population growth rates, one of the worst affected by climate change, and now we’re at the point that even one piece of particularly bad news could send us tumbling into default.

This matter should, therefore, be taken care of at once and FBR, and all such institutions, must be given strict instructions about the limits of their actions in future.

Copyright Business Recorder, 2022


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Shaukat Hayat Jun 19, 2022 11:19am
This is a misconception that foreign grants are being taxed. A foreign loan/grant is first recieved to a government deptt/agency, which then makes payment from it to a vendor/contractor. It is this amount / payment from the grant/loan that is subjected to tax. So, it is actually the income derived by the vendor that is taxed. Not taxing this portion of the grant would mean that the vendor/contractor is being treated as exempt.
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