Karachi, May 2, 2025 – The Pakistan Stock Exchange (PSX) has urged the government to restore the tax exemption on inter-corporate dividends for companies eligible for group taxation.
In its proposals for the upcoming federal budget 2025-26, the PSX recommended that the government reinstate the tax exemption under section 59B of the Income Tax Ordinance, 2001, for dividends paid between companies within a corporate group.
The PSX’s recommendation comes in response to the growing need to promote a fairer tax system and encourage corporatization. According to the PSX, removing the exemption on inter-corporate dividends would undermine the efforts to establish a robust and transparent corporate environment. By reinstating the exemption, companies within corporate groups would benefit from a tax regime that fosters equal treatment, leading to improved documentation practices and potentially increased tax revenue over time.
The proposed amendment to the Income Tax Ordinance calls for the inclusion of the following clause in Part I, Second Schedule, clause 103C: “Dividend income derived by a company, if the recipient of the dividend, for the tax year, is eligible for group relief under section 59B.”
The rationale behind this proposal is that taxing corporate profits twice—once at the company level at 29% and then on dividend distribution at 15%—creates a discouraging financial burden on corporate groups. This double taxation, combined with the imposition of an additional super tax of up to 10% for high earners as stipulated in the Finance Act 2023, disincentivizes businesses from operating in compliance with best practices of corporate governance.
By exempting inter-corporate dividends, the PSX believes that corporate groups will be more likely to follow governance norms, improve transparency, and contribute positively to the overall economy. However, the removal of this exemption has been deemed unfavorable, as it creates unnecessary barriers for businesses striving to align with regulatory standards.
In conclusion, the PSX’s proposal emphasizes the importance of a fair tax system to encourage corporate compliance and the formation of corporate groups that abide by sound governance principles. Reinstating the exemption for inter-corporate dividends would go a long way in enhancing the country’s corporate landscape and boosting economic growth.