Karachi, April 28, 2025 – Pakistan Stock Exchange (PSX) has formally urged the government to review the current tax treatment of bonus shares in the forthcoming federal budget for 2025-26.
In its latest budget proposals, PSX emphasized that the present taxation framework regarding bonus shares is hampering the growth and vibrancy of the capital market.
According to PSX, the classification of bonus shares as taxable income has discouraged listed companies from issuing them. Historically, under the Income Tax Act, 1922, bonus shares were excluded from the definition of income because shareholders did not derive any real income from receiving bonus shares. PSX pointed out that international tax practices also recognize that bonus shares, being a reclassification of reserves, should not be treated as income.
The PSX highlighted that the Finance Act, 2014 first introduced a tax on bonus shares at a rate of 5%, classifying them as “Income from Other Sources.” This measure was reversed in the Finance Act, 2018 following extensive advocacy by PSX, which demonstrated that taxing bonus shares reduced their issuance without significantly increasing government revenue.
However, in 2023, a new provision — Section 236Z — was introduced, once again taxing bonus shares by treating them as deemed income and applying a 10% withholding tax. PSX argues that this move has negatively impacted the market, as evident from the statistics: between July 1, 2022, and June 30, 2023, 53 companies announced bonus shares worth Rs. 31.4 billion (at face value), while only 12 companies announced Rs. 24.8 billion worth of bonus shares between July 2023 and January 2025.
PSX stressed that taxing bonus shares is not only restricting growth for listed entities but also deterring unlisted companies planning to expand through public listings. Issuing bonus shares is a crucial step for these companies to strengthen their capital base, and the unnecessary tax burden is becoming a significant hurdle.
Furthermore, PSX explained that bonus shares do not constitute real income, as no consideration is received by shareholders. Instead, it is merely an internal adjustment of reserves. Consequently, imposing a tax on bonus shares is fundamentally flawed and contradicts the spirit of the tax laws.
In light of these concerns, PSX strongly recommends that the government withdraw the amendments made through the Finance Act, 2023, specifically clause (29) of Section 2 and Section 236Z, to restore confidence and promote capital market growth.