The Federal Board of Revenue (FBR) is contemplating the imposition of a 5% tax on bonus shares issued by companies and their undistributed profits in the upcoming budget. This proposal is expected to primarily impact family-owned companies while benefiting minority shareholders.
According to sources, the FBR is considering reinstating two previously dropped tax measures. These measures involve levying a 5% income tax on bonus shares instead of paying dividends to shareholders.
If approved by the finance minister and the prime minister, the bonus tax proposal would provide a dual benefit to the tax authorities. If companies pay dividends, the FBR would receive a 15% tax, and if companies opt to issue bonus shares, the FBR would still collect a 5% tax. Finance Minister Ishaq Dar will soon review and decide on the taxation proposals as the budget announcement is just five days away.
In 2014, the government had previously imposed a tax on bonus shares to close tax evasion loopholes. However, this tax was later removed. Now, the government aims to reintroduce the tax on bonus shares and the tax on undistributed profits.
For the upcoming fiscal year, the government is targeting a tax collection of Rs9.2 trillion, indicating a focus on extracting revenue from existing taxpayers rather than expanding the tax base.
The FBR has also finalized a proposal to reinstate the tax on undistributed profits. This tax had been removed by the previous government. The proposal suggests a 5% income tax on the undistributed profits of companies.
This proposal serves as an alternative to the Reform and Revenue Mobilization Commission’s (RRMC) suggestion to impose a 5% to 7.5% tax on the undistributed reserves of companies. However, the business community and the FBR have opposed the RRMC proposal, leading the tax authorities to consider reviving the old tax on undistributed profits.
During a recent meeting with the finance minister, the Pakistan Business Council (PBC) expressed opposition to the proposal of a 5% tax on undistributed reserves, citing liquidity concerns and the cost of funding working capital.
To increase capital levels and avoid the tax, some companies with significant reserves have started issuing bonus shares. The Securities and Exchange Commission of Pakistan (SECP) is expected to earn at least Rs500 million in fees from these companies.
In response, the FBR plans to impose a 5% tax on the issuance of bonus shares to counter this strategy and generate significant revenue.
The government’s goal is to overcome the crisis and assure the business community that Pakistan will not default. Despite the delays in reaching a staff-level agreement with the International Monetary Fund (IMF), the finance minister has promised long-term improvements and planned reforms for the country.
The finance minister also criticized those who predict default, stating that such predictions should be viewed with skepticism.
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