KARACHI: Federal Board of Revenue (FBR) has been proposed to rationalize of withholding tax on dividends as higher rate from equity investments discourage investment in the capital market.
Pakistan Stock Exchange (PSX) in its proposals for budget 2020/2021 submitted to Federal Board of Revenue (FBR) said that withholding tax on profit from debt instruments is currently charged a lower rate compared to the withholding tax charged on dividend from equity investments.
The difference ranges between 2.5 percent – 5 percent. This reduces the incentive to invest in the equity market.
Tax treatment on various asset classes should not be the primary driver of investment decisions, the PSX said, adding that the profit on debt and dividends should receive the same tax treatment.
At present, it is observed that corporate profits are first taxed at company level, and subsequently, the resulting profits which are distributed as dividends are taxed at the individual level.
This is essentially a form of double taxation, and result in the misallocation of capital in an economy by giving an upper hand to fixed income investments.
To remove this discrepancy, the government should introduce a mechanism to eliminate the distortion on the tax charged on dividends, and make the effective tax rate equal to that on debt.
| Tax rate on investments | Profit paid is more than rupees five hundred thousand | Profit paid is rupees five hundred thousand or less |
| Profit on Debt u/s 151 | 15 percent | 10 percent |
| Sukuk-holder (individual or an association of person), if the return on investment is more than one million U/S 150A | 12.5 percent | |
| Sukuk-holder (individual and an association of person), if the return on investment is less than one million U/S 150A | 10 percent | |
| Dividend U/S 150 & 236S | 15 percent |
The PSX submitted following proposals:
i. Government should introduce a mechanism to remove the double taxation of company’s profits – once in the hands of the company, and once in the hands of shareholders as dividends – such that the effective tax rate on dividends is on par with profit on debt.
ii. Rationalize the current tax rate on dividends to make it equal to the tax rate on profit from debt.
Provided that there should be no withholding tax on dividend up to Rs100,000 per annum.
Giving rationale to the proposals, the PSX said that a similar tax treatment on dividend from equity investment and debt instrument will provide a level playing field to equities and attract higher inflows in the stock market. Further, it would lead to increase in numbers of UINs.
The PSX proposed following proviso should be inserted in section 150 and Section 236S to the Income Tax Ordinance, 2001:
“Provided that there should be no withholding of tax where amount does not exceed Rs100,000 per annum.”
Clause (b) Division-I, Part III, First Schedule to the Income Tax Ordinance, 2001, for the word ’15 percent’ shall be substituted by ’10 percent.’
