FBR explains how Section 112 treats income from securities following certain disposal and re-acquisition arrangements.
The Federal Board of Revenue (FBR) has clarified the tax treatment and liability arising from certain transactions involving securities during Tax Year 2027.
The relevant provision is contained in Section 112 of the Income Tax Ordinance, 2001, titled “Liability in respect of certain security transactions”.
The FBR’s updated Income Tax Ordinance applies to Tax Year 2027, covering the period from July 1, 2026 to June 30, 2027.
Income remains taxable to original owner
Under Section 112, where the owner of a security disposes of that security and subsequently re-acquires it, the tax treatment is determined by the substance of the transaction.
If, as a result of the disposal and subsequent re-acquisition, any income payable in respect of the security becomes receivable by a person other than the original owner, that income will nevertheless be treated, for all purposes of the Income Tax Ordinance, as income of the original owner.
The provision therefore prevents the tax liability associated with income from a security from being shifted to another person merely through a disposal and subsequent re-acquisition arrangement.
Securities covered under Section 112
The FBR has defined “security” broadly for the purposes of the provision.
Under Section 112(2), the term includes:
• Bonds
• Certificates
• Debentures
• Stocks
• Shares
The rule can therefore apply to a range of financial instruments where ownership is temporarily transferred and subsequently restored, provided the transaction results in income relating to the security becoming receivable by someone other than the original owner.
Tax treatment follows original ownership
The provision focuses on the person who originally owned the security rather than simply the person who receives the related income following the transaction.
Where the conditions of Section 112 are met, the income remains attributable to the original owner for tax purposes, despite the disposal and subsequent re-acquisition of the security.
This ensures that a change in the recipient of income resulting from such an arrangement does not, by itself, alter the underlying tax treatment.
Tax Year 2027 applicability
The clarification forms part of the FBR’s updated Income Tax Ordinance, 2001, applicable to Tax Year 2027 from July 1, 2026 to June 30, 2027.
Section 112 establishes that income arising from covered securities will continue to follow the original owner’s tax position where the specified disposal and re-acquisition conditions are satisfied.
The provision is therefore relevant to taxpayers involved in securities transactions where ownership is transferred and subsequently restored and income associated with the security becomes receivable by another person.