ISLAMABAD: As the Pakistani rupee faces renewed strain, the State Bank of Pakistan (SBP) has proposed conditioning tax benefits for foreign investments on a minimum one-year holding period in government debt and equity markets. The move aims to bring greater predictability to foreign currency outflows.
Speaking at a meeting of the National Assembly Standing Committee on Finance on Saturday, SBP Executive Director Dr Mohammad Ali Malik recommended that the reduced 10% income tax rate apply only to foreign investments retained for at least one year via the Special Convertible Rupee Account (SCRA). The session was chaired by Syed Naveed Qamar of the Pakistan People’s Party (PPP).
Federal Board of Revenue (FBR) Chairman Rashid Langrial supported the idea of discouraging short-term speculative investments, suggesting a minimum six-month holding period for Roshan Digital Accounts and similar schemes to qualify for tax incentives.
However, committee members cautioned that tighter tax conditions might deter much-needed foreign investment at a critical time for the economy.
Dr Malik countered that the proposed measure would not hurt current inflows, as significant investments in treasury bills, bonds, or SCRAs were not presently being seen. He argued that linking tax relief to long-term investment would help manage foreign exchange outflows more predictably.
Under existing SBP rules, non-resident investors can freely invest in and trade government securities — including Treasury Bills, Pakistan Investment Bonds (PIBs), corporate debt, and WAPDA bonds — through SCRAs.
Rupee under pressure, oil prices add to concerns
After a period of relative stability, the rupee has again weakened, trading at around Rs284 to the US dollar in the interbank market, with higher rates in open market transactions. A senior banker noted that large interbank deals were clearing at roughly Rs3 above average rates.
Advisory firm Tola Associates, in an economic update Saturday, warned that surging oil prices — driven by Gulf tensions — threaten to further erode Pakistan’s fragile economic position. Brent crude has risen from $63.76 per barrel on June 2 to $76.31 by June 19, raising alarm over potential inflation and current account pressures.
Tola projected that if oil hits $80 per barrel, the rupee could fall to Rs285.4, and if prices climb to $100, the exchange rate might slide further to Rs292.1. Domestic petrol prices could rise by Rs35 per litre in that scenario, pushing inflation higher.
The government has formed a special committee, led by Finance Minister Muhammad Aurangzeb, to assess the fallout of the escalating Middle East conflict on Pakistan’s economy and fuel supplies.
Tax reforms under review
The finance committee also examined proposals aimed at curbing tax avoidance in government debt markets. One measure would tax income on government debt even if investors sell before maturity — a move targeting “coupon washing,” where investors sell and rebuy securities to evade taxes. The FBR estimates the measure could generate Rs10 billion in additional revenue. The committee, however, softened the proposal, reducing the minimum holding period for tax purposes from one year to six months.
Separately, the committee approved raising the cash withdrawal threshold for non-filers — subject to a 0.8% withholding tax — from Rs50,000 to Rs75,000. It rejected the FBR’s bid to increase the tax rate on these withdrawals to 1%.
