Government likely to raise yield on tax refund bonds

KARACHI: The government may increase yield on tax refund bonds to make their trade attractive in financial markets, sources said on Monday.

Sources in Corporate Regional Tax Office (CRTO) Karachi said the finance ministry was mulling increasing the yield of tax bonds, as its present rate of 10 percent was not viable for claimants.

Last year, the government decided to issue the securities in lieu of stuck refunds in both sales and income tax to help exporters and manufacturers ease liquidity problems. It was planned that Rs100 billion worth of notes would be issued. Till September this year, the government issued sales tax refund bonds worth Rs22 billion.

The sources said several meetings were held between the Federal Board of Revenue and business community on the low interest rate issue. “It was agreed to increase the yield of bond but the rate remained undecided,” an official at the CRTO Karachi said.

Presently, the benchmark interest rate is 13.25 percent, while weighted average yield of benchmark 6-month T-bill is around 13.8 percent.

Under the law, the bonds are to be issued in values in multiples of Rs100,000. They have a maturity period of three years and bear annual profit of 10 percent. Bonds can be traded freely in the country’s secondary markets and accepted by the banks as collateral.

Banks are, however, hesitant to make investment in lower yield bond, which is lower than the policy rate. The business community is facing difficulties in depositing the bonds with the financial institutions.

Karachi Chamber of Commerce and Industry (KCCI) last week said the situation has intensified the hardships for the export-oriented industries due to severe liquidity crunch, leaving no other option but to curtail their production and maintain their share in the existing international markets.

“Despite specific directions in the relevant act, these bonds are neither being traded freely in the market nor being accepted by the banks, creating severe liquidity problems for the exporters who are unable to finish their export orders,” KCCI said in a letter to the central bank. “Hence the situation is likely to shrink the overall exports and may also result in further depreciation of the desperately foreign exchange reserves of the country.”

Federation of Pakistan Chambers of Commerce and Industry, in a statement last month, also criticised the government for delaying settlement of sales tax refund bonds.

The new refund system promised to issue refund within 72 hours is still not implemented under new rules that have some lacunas, the FPCCI said.