SBP says legal amendments pull out barriers to foreign investment in government debt

KARACHI:The central bank on Thursday said amendments in tax laws have removed ‘key impediments’ to investment from nonresidents into the country’s longer-tenor debt instruments.

“These amendments aim to deepen our capital markets, support availability of long term rupee financing sources, support competition in the local currency debt market, and diversify the source of funding for the government,” the State Bank of Pakistan (SBP) said in a statement.

The SBP said the existing foreign exchange framework allows nonresidents to invest in debt instruments and government securities through special convertible rupee account (SCRA) maintained with banks in Pakistan.

“However, the tax structure for non-residents investing in debt securities was historically complex,” it said. “Different rates applicable for the withholding tax on profit on debt and capital gains tax, penal transaction charges for non-filers, a complex tax-filing process and uncertainty about tax applicability were the key impediments to foreign investment into the local debt market, particularly in the long-term debt instruments.”

The government last week promulgated Tax Laws (Second Amendment) Ordinance, 2019, amending the Income Tax Ordinance, 2001.

Analysts said higher interest rates are attracting foreign inflows into the country’s debt market. Foreign investment in government securities reached $1.2 billion in the first five months of the current fiscal year of 2019/20. These inflows are expected to be in the range of $2.5 to 3 billion till end of the current fiscal year.

Interest rate is hovering around decade-high of 13.25 percent with the market expecting it to stay unchanged in the near term.

The SBP said the recent amendment in the tax laws has simplified tax regime for investment in the local debt market. Specifically, the above ordinance has implemented the changes in Income Tax Ordinance, 2001 to simplify the tax regime for non-resident companies, having no permanent establishment in Pakistan, investing through SCRA in debt instruments and government securities, including treasury bills and Pakistan investment bonds.

Under the amended law, the capital gains tax would be subject to withholding at the rate of 10 percent and constitute final discharge of the tax liability. There would be no deduction of 0.6 percent banking transaction tax under section 236P on transactions in SCRA.

Investors are exempted from advance tax payment on capital gains under section 147. There would be dispensation from the requirement of registration under section 181, filing of return under section 114 and filing of statement of final taxation under section 115 in respect of income solely from capital gains or profit on debt from investment in debt securities. There would be no distinction in terms of filer or non-filer.

Many non-resident investors currently benefit from tax treaties and already enjoy reduced rates of taxation around 10 percent. The SBP said the key provision in the ordinance is to simplify the tax structure and process for international investors.

“The above amendments will help to deepen the capital market, generate greater interest in the longer-dated government securities, diversify the investor base, and reduce the cost of debt for the government.”