KARACHI, August 20, 2024 – The Federal Board of Revenue (FBR) has announced updated tax rates on dividend income for the tax year 2024-25, as per the amendments made to the Income Tax Ordinance, 2001, updated on June 30, 2024.
These changes are poised to impact various categories of dividend recipients, from individual investors to large corporate entities.
The taxation of dividend income is governed by Section 5 of the Income Tax Ordinance, 2001. Under this section, a tax is imposed on every person receiving a dividend from a company, subject to the specified rates detailed in Division III of Part I of the First Schedule.
Key Provisions of Section 5: Tax on Dividends
1. Tax Rate Application: The tax on dividend income is calculated by applying the relevant rate to the gross amount of the dividend received. However, dividends that are exempt under the Ordinance are not subject to this tax.
2. Tax Rates for Different Dividend Sources:
o Independent Power Producers (IPPs): A tax rate of 7.5% is levied on dividends paid by IPPs, where such dividends are a pass-through item under an Implementation Agreement, Power Purchase Agreement, or Energy Purchase Agreement. These dividends are reimbursed by the Central Power Purchasing Agency (CPPA-G) or its successor entities.
o Mutual Funds and Real Estate Investment Trusts (REITs): The general tax rate for dividends received from mutual funds and REITs is set at 15%. However, if the mutual fund derives 50% or more of its income from profit on debt, the tax rate increases to 25%.
o REIT Schemes and Special Purpose Vehicles (SPVs): Dividends received by a REIT scheme from an SPV are exempt from tax, while a 35% tax rate applies to dividends received by others from an SPV as defined under the Real Estate Investment Trust Regulations, 2015.
o Other Companies: A 25% tax rate is imposed on dividends received from a company where no tax is payable by that company due to income exemptions, carry forward of business losses, or claims of tax credits under the relevant parts of the Ordinance.
Implications for Taxpayers
These updated rates are designed to ensure that the tax system remains equitable, reflecting the varying risk profiles and income sources of different entities. The FBR’s move to clarify and update these rates underscores the government’s commitment to streamlining tax processes while ensuring compliance with the broader objectives of fiscal policy.
Taxpayers are advised to review these changes carefully, particularly those involved in the power generation, mutual funds, and real estate sectors, as these areas have seen notable adjustments. Ensuring accurate compliance with the new tax rates will be critical to avoid any potential penalties or issues with tax filings for the 2024-25 fiscal year.
