Dollar Likely to Break All Records After FED on Exchange Companies

The abrupt imposition of a 16 percent federal excise duty (FED) on exchange companies might push the dollar rate above Rs. 200.

Currency dealers informed reporters that they are receiving letters from the Federal Board of Revenue (FBR) for the non-payment of a 16 percent FED, worth hundreds of millions of rupees, that was originally withdrawn in 2016.

These notices have sparked panic among currency dealers, who are concerned that the new surcharge will push the dollar rate above Rs. 200.

In a letter addressed to Finance Minister, Shaukat Tarin, the Exchange Companies Association of Pakistan (ECAP) President, Malik Bostan, complained that the tax machinery was harassing exchange companies by issuing “illegal notices.”

He argued that no one would choose to purchase or sell currencies through the active exchange dealers if they started charging 16 percent FED on currency exchange and workers’ remittances. He warned that as a consequence, “the entire foreign exchange business will relocate and operate through the illegal Hawala/Hundi operators and the black market,” sending the rupee plunging below Rs. 200 per dollar.

The ECAP chief commented that the additional levy appears to be “a conspiracy against the government” since exchange companies already pay a 29 percent income tax on profits that they earn through buying and selling currencies. The grey market has already taken a big chunk of the currency business. “It offers a higher price. Dollars are being sold at higher rates to smugglers, hawala people, and Afghans,” he said.

“Once again, implementing the tax (16 percent FED) is a plot against the government”, he remarked, further underlining the importance of stopping the tax machinery from sending such illegal letters.

“The exchange companies, which deal in buying and selling of foreign currencies, do not come under the services sector,” he said.

Bostan believes that enforcing the 16 percent withholding tax would be counterproductive since the market is already unpredictable and extremely volatile, and the government is under pressure. “In a meeting with the FBR chairman, we informed him about the consequences of the 16 percent withholding tax,” he stated.

He went on to say that the FBR Chairman had offered guarantees to the exchange companies that the tax notices will be withdrawn and that they would not be harassed by tax officers.

By default, exchange companies are not included in the services sector. Profits earned by exchange companies from buying and selling currencies are already taxed at a rate of 29 percent.

To recall, the 16 percent FED and sales tax on currency exchange were revoked by the federal and provincial governments and the tax regulator many years ago. Experts argue that the re-imposition of these taxes could burden the already strained exchange unit and impede economic growth.