KARACHI: Pakistan Stock Exchange (PSX) has said that tax rates for compliance by corporate entities is much higher than the persons out of the tax net.
The PSX in its proposals for budget 2022/2023 submitted to Federal Board of Revenue (FBR), said corporate business profits are taxed twice. Once at company level at 29 per cent and on dividend distribution at 15 per cent.
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As compare to 44 per cent of total tax in case of companies, unincorporated businesses are being taxed from 0 per cent to 35 per cent in slabs.
This inequality in taxation is discouraging corporatization and documentation as unincorporated businesses are subject to substantially lower taxes.
Absence of clarity in tax laws is causing issues of taxation of Limited Liability Partnership (LLPs) as companies whereas LLPs are essentially AoPs with perpetual life.
Removal of exemption on inter-corporate dividend under section 59B of the Income Tax Ordinance, 2001 is unfavorable to potential corporate groups discouraging compliance with the best practices of corporate governance requirements.
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The PSX said that inequality of taxation of business shall gradually be removed by reducing corporate tax rate/increasing tax rates for AoPs [First Schedule Part 1, Division I, II, IIA & III].
Restoration of exemption on inter-corporate dividend between companies eligible for group taxation under section 59B of the Income Tax Ordinance, 2001.
Giving rationale to the proposal, the PSX said that equality of tax regime will promote corporatization culture leading towards documentation and will therefore generate more tax revenue.
Adding clarity with respect to status of LLP will encourage more business particularly in services sector to opt for this perpetual business structure. It will also help in increasing tax revenue from these segments.
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Definition of AoP in section 80(2) of Income Tax Ordinance, 2001 be amended to include LLP till the time same tax rates are not applied to all forms of business.
Part I, Second Schedule, clause 103C reinstated as follows:
“Dividend income derived by a company, if the recipient of the dividend, for the tax year is eligible for group relief under section 59B.”
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