Bangladesh Bank (BB) has urged the National Board of Revenue (NBR) to reconsider a 20% “withholding tax” imposed on foreign loan interest payments in the current budget. The central bank argues that this tax would increase borrowing costs from foreign sources by one-fourth. The NBR had previously waived this tax on foreign loans in 1976 but rescinded it in May this year( 2023).
The tax affects local banks’ offshore banking units and buyers’ credit. Calculated on a gross-up basis, the effective tax rate is 25%. The central bank warns that this tax could discourage foreign loans, impacting liquidity and the exchange rate. Business leaders and bankers are concerned that the tax will disrupt the growth of the industrial sector, as entrepreneurs have relied on these cost-effective loans for expansion. Foreign investors may lose confidence due to unanticipated tax measures. As a result, interest rates on foreign loans have surged, further impacting borrowers.
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