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Remittance package tries to plug leaks

Updated October 29, 2018

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Steps announced in the package are aimed more at addressing the problem of double taxation faced by freelancers.— Reuters/File
Steps announced in the package are aimed more at addressing the problem of double taxation faced by freelancers.— Reuters/File

On October 19, foreign exchange reserves held by the State Bank of Pakistan (SBP) plunged to $7.825 billion, not enough to cover even seven weeks’ imports bill. This happened before Prime Minister Imran Khan’s visit to Saudi Arabia where he managed to secure a friendly forex support package of $6bn for the current fiscal year.

Any build up in reserves that we might see in the near future will reflect the impact of Saudi support, of which $3bn will come in the form of direct placement of dollars into our national accounts and up to $3bn of oil imports on deferred payments a year, for a period of three years.

Keeping in mind the Saudi package plus similar support packages likely to come from China and the UAE is important to understand how badly Pakistan needs foreign funds to keep its balance of payments in shape.

If everything goes as planned, such support packages will help the country seek a smaller than previously thought of IMF loan so as to avoid politically harsh and painful conditions.

It is in this backdrop that the government has also announced an incentive package for boosting remittances besides providing import duty concessions to exporters, and is also preparing a plan to get more foreign investment.

Steps announced in the package are aimed more at plugging in leakage in services export and addressing the problem of double taxation faced by freelancers

Attracting thicker flows of home remittances, boosting export earnings and preparing the ground for getting more foreign investment are key strategies to reduce reliance on external borrowing.

Doing so has become a must for several reasons including the need to keep the cost of foreign debt servicing within manageable levels. In FY18, Pakistan spent about $7.5bn on servicing of public and private external debts.

In this context, recent incentives announced for facilitating Pakistanis who wish to send money back home through official channels is a step in the right direction.

But the incentives are in the form of direct dividend for banks or through procedural changes aimed at enabling the same. In some cases, the changes are designed to incentivise services exports of individual Pakistanis living within the country.

Under the incentive package banks can now treat certain Business to Consumer (B2C) and Consumer to Business (C2B) transactions as home remittances.

Forex earnings of those resident Pakistanis involved in freelance work of information system services for IT firms and online platforms can also be treated as remittances. But the condition is that the forex earning of such resident Pakistanis should not exceed $1,500 per person per month.

Banks can also treat as remittances forex earnings of resident Pakistanis engaged in foreign freelance jobs in other kinds of services. In this case, too, the limit is up to $1,500 a person a month.

Both announced in the package are aimed more at plugging in leakage in services export and addressing the problem of double taxation faced by freelancers.

According an SBP circular issued after the remittance package announcement, banks are now permitted to treat as remittances pensions received from foreign governments and international organisations by Pakistanis residing within the country.

Conceptually all these steps have little to do with boosting remittances for the obvious reason that they address issues of forex income faced by resident Pakistanis. But, nonetheless the steps will most likely boost inflows of foreign exchange into the country by a few hundred millions of dollars a year.

In first quarter of this fiscal year, Pakistan got about $5.42bn in home remittances, up 13pc from $4.79bn in a year-ago period. Bankers believe that full year remittances should reach around $22bn against $19.6bn in the last fiscal if the incentive package really works.

Under this package, investment coming from real estate development and housing societies of overseas Pakistanis for land purchase or building of housing units will also be treated as home remittances.

This is a big incentive for overseas Pakistanis who earlier had to face taxation and other procedural issues in using remittances for investment in purchase of land or housing units in Pakistan. The SBP has, however, clarified to banks that foreign exchange coming in for equity participation in a business in Pakistan cannot be treated as remittances.

The central bank has informed banks that foreign exchange coming into accounts of utility companies, telecoms, superstores, educational institutions, universities and hospitals from individual overseas Pakistanis will also be treated as home remittances.

This step will not only help in computing hitherto stray forex inflows into the account of remittances but will also check misdeclaration of forex incomes of the above listed institutions.

The package also promises banks and forex companies an incentive of Re1 per each additional dollar of remittances handled by them if the volume of remittances handled by them is 15 per cent higher than in the last fiscal year.

Officials of forex companies term it a big incentive but many also complain that the issue of double taxation of remittances received through forex companies still remains unresolved.

When remittances come via banks out of the earnings of overseas Pakistanis who have paid taxes in the host countries, all they have to do is to produce a certificate to tax authorities and the remitted amount is not taxed again in Pakistan. This is not the case with remittances handled by foreign exchange companies.

Published in Dawn, The Business and Finance Weekly, October 29th, 2018