In a bid to promote and incentivize Shari’ah-compliant business practices, the Federal Board of Revenue (FBR) has issued a set of criteria defining the eligibility for reduced tax rates for companies whose shares are traded on a stock exchange.
This move, explained in the updated Income Tax Rules, 2002 under Rule 231H, is part of the government’s commitment to creating a business-friendly environment that aligns with Islamic principles.
Under Rule 231H, companies seeking to benefit from the reduced tax rate in accordance with sub-clause (a) of clause (18B) of Part-II of the Second Schedule to the Ordinance must meet specific Shari’ah-compliant criteria. The key conditions outlined in the rule are as follows:
1. Business Conduct in Accordance with Shari’ah Principles:
• The primary business activities of the company must be Halal, adhering to Shari’ah principles. This entails avoiding involvement in the processing or manufacturing of pork, liquor, non-Halal products, pornographic material, or any other activities prohibited by Shari’ah.
2. Riba-Free Financing:
• The company must maintain a balance sheet with Riba-free financing. While the company may utilize leverage, it should be through Islamic modes of financing obtained from licensed Islamic financial institutions. This condition aligns with the prohibition of interest (Riba) in Islamic finance.
3. Shari’ah-Compliant Investments:
• All investments made by the company should be one hundred percent Shari’ah-compliant. This means that the company cannot acquire non-Shari’ah compliant instruments or securities that yield interest or income deemed non-Halal by Shari’ah principles.
4. Maintenance of Free Float:
• The company is obligated to maintain a free float of thirty percent of the outstanding shares. The free float represents the portion of shares available for trading in the open market and contributes to the liquidity and transparency of the company’s shares.
These criteria aim to foster an environment where businesses can thrive while operating in accordance with Shari’ah principles. By offering reduced tax rates to companies meeting these criteria, the government seeks to encourage the adoption of ethical and Islamic business practices in the financial and corporate sectors.
The move is expected to attract businesses that prioritize Shari’ah compliance, not only contributing to the growth of the Islamic finance sector but also reinforcing Pakistan’s commitment to providing an inclusive and supportive environment for businesses adhering to ethical and religious principles.
This initiative reflects the government’s recognition of the importance of Islamic finance and business ethics in the country’s economic landscape. As businesses increasingly consider Shari’ah compliance, the reduced tax rates are likely to serve as a catalyst for companies to embrace and showcase their commitment to ethical and responsible business practices.
