Tax Deduction on Interest on Foreign Borrowing Will Make Foreign Loan Costlier

In the recent changes in Finance Bill, interest on foreign loans is now subject to 20.0% tax deduction which was earlier tax exempted.

Given the persisting high rate in SoFR and margin, current effective interest rate on foreign loan for entities in Bangladesh stands in the range between 8.0%-9.0%.

With the recent 20.0% tax imposition which is likely to be adjusted with the interest cost, total interest cost of foreign loans would go up to ~10.5%. Moreover, exchange rate movements can put additional cost burden on the part of borrowers.

Currently, local corporates in Bangladesh can borrow at maximum 10.1% rate from banks. This makes foreign loan more expensive than local loan which will drive local borrowers away from foreign borrowing which is likely to exert downward pressure on balance of payment (BoP).