FBR Explains Tax on Bonus Shares for Public and Private Companies

FBR Explains Tax on Bonus Shares for Public and Private Companies

Karachi, July 26, 2023 – The Federal Board of Revenue (FBR) has declared that the newly introduced tax on bonus shares is applicable to both public and private companies.

This announcement came through Circular No. 2 of Income Tax issued by the FBR on Wednesday, aiming to clarify the reintroduction of bonus shares through the Finance Act of 2023.

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According to the FBR, the Finance Act 2023 has reintroduced a tax on shareholders for any bonus shares issued by companies, regardless of their public or private status. To facilitate this implementation, three key amendments have been made to the tax laws:

Amendment to the Definition of ‘Income’: The definition of ‘income’ under section 2(29) of the Ordinance now includes a reference to the newly inserted section ‘2362’. Consequently, any amount that is subject to tax collection and payment under section 236Z will be considered as ‘income’ under the Ordinance.

Inclusion in ‘Income from Other Sources’: A new clause (lb) has been added to section 39 of the Ordinance, which pertains to ‘Income from other sources’. This clause explicitly includes the income arising to the shareholder of a company from the issuance of bonus shares as income from other sources.

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Introduction of Section 236Z: A new section 236Z has been inserted into the Ordinance, specifically addressing the collection and payment of tax on the issuance of bonus shares. According to this section, companies are now responsible for withholding 10% of the bonus shares as a withholding tax, which must be deposited at the day-end price on the first day of the closure of books for listed companies. For companies that are not listed, separate rules will be established to determine the value of bonus shares on which tax is to be collected and paid.

The withheld shares will be made available to the shareholder if they pay an amount equivalent to the value of the bonus shares withheld. However, if a shareholder does not pay the required amount to acquire the withheld bonus shares, the company is obliged to sell the withheld shares in the market and deposit the sale proceeds to cover the tax liability on behalf of the shareholder.

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Companies are required to deposit the tax within 15 days of the closure of books, and they have the right to recover the tax from the shareholder either by disposing of the withheld shares or collecting the amount of tax directly from the shareholder. The tax collected and paid by the company under this section will be treated as tax paid by the shareholder, ultimately serving as the final discharge of the shareholder’s tax liability on the deemed income arising from the issuance of bonus shares.

With this announcement, the FBR aims to ensure transparency and compliance in the taxation of bonus shares, promoting a fair and equitable system for both public and private companies and their shareholders.

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