PkRevenue.com – The Pakistan Business Council (PBC) has voiced strong opposition to the imposition of a withholding tax on bonus shares issued by companies.
In its proposals for the upcoming 2024-25 budget, the PBC has emphatically recommended the removal of this tax provision.
The controversy stems from Section 236Z, which was added to the Income Tax Ordinance, 2001 through the Finance Act 2023. This section mandates that companies must withhold a 10% tax on the value of bonus shares issued. According to the PBC, this tax obligation means that companies can only issue bonus shares if they collect a 10% tax from shareholders based on the value of these shares, including the withheld portion.
The PBC argues that this section should be entirely deleted. Their stance is based on several key points:
1. Fair Market Value vs. Face Value: The PBC highlights that the tax is proposed to be levied at the fair market value of the shares, not considering that bonus shares are issued at their face value. This discrepancy creates an unjust tax burden on shareholders.
2. Nature of Bonus Shares: Bonus shares do not constitute income for shareholders. Instead, they merely represent a division of the value of existing shares in proportion to the newly issued bonus shares. Thus, taxing them as if they were income is fundamentally flawed.
3. Impact on Tax Revenue: The PBC asserts that taxing bonus shares at 10% for private companies will ultimately reduce the government’s overall tax revenue. Before this tax was introduced, bonus shares were recorded at zero value, and the entire proceeds from their disposal were treated as capital gains, taxable at applicable slab rates (usually 35% for shareholders of most private companies). If a 10% final tax is levied on the value of bonus shares, this value will be treated as the cost of those shares. Consequently, only the increment amount (the difference between disposal proceeds and the value on which tax was deducted) will be taxable, resulting in a reduction in overall tax revenue.
The PBC’s recommendations reflect a broader concern within the business community about the potential negative impacts of this tax on corporate practices and investment incentives. By opposing Section 236Z, the PBC aims to protect shareholders from an unjust tax burden and to ensure that the government’s tax policies do not inadvertently reduce overall tax revenue.
As the government prepares to finalize the budget for 2024-25, the PBC’s proposals are expected to play a significant role in shaping the final fiscal policies. Whether the government will heed these recommendations and adjust the taxation of bonus shares remains to be seen.
