Karachi, Pakistan – The Finance Act, 2023, has brought back the tax on bonus shares, which will take effect from July 1.
This move has generated mixed reactions from investors and market analysts. The tax on bonus shares was initially introduced through the Finance Act 2014, but it was abolished in 2018 following representations made by the Pakistan Stock Exchange.
READ MORE: Experts Analyze Amendments to Deemed Property Income in Finance Act 2023
Under the Finance Act 2023, a new section called 236Z has been added to the Income Tax Ordinance, 2001, which treats bonus shares as deemed income subject to the collection of tax in a prescribed manner. The Act defines the amount subjected to this tax as ‘income’ in section 2(29), effectively making it chargeable to tax.
According to the new provisions, bonus shares declared by a company will be considered ‘income from other sources’ for shareholders and will be subject to tax. The Act introduces a withholding tax on bonus shares, set at a rate of 10 percent of the value of bonus shares. For listed companies, the value will be determined based on the day-end price of the first day of the closure of books, while for other companies, a prescribed value will be used.
Key features of the new withholding tax provisions include:
READ MORE: Pakistan Scraps Proposal to Grant Immunity to Foreign Remittances
• Companies issuing bonus shares must withhold 10 percent of the bonus shares to be issued.
• Bonus shares will only be issued to shareholders if the company collects from them a tax equal to 10 percent of the value of bonus shares, including the withheld shares, based on the determined value.
• Companies must deposit the tax within 15 days of the first day of the closure of books, regardless of whether or not the tax is collected from shareholders.
• If a shareholder fails to make the tax payment within fifteen days of the issuance of bonus shares, the company has the right to dispose of the shareholder’s bonus shares to the extent that tax has been paid on their behalf.
• Bonus shares will be considered as the income of the shareholder.
READ MORE: Threshold of Cash Salary Payment Increased to Rs32,000
• The tax paid under this section will be considered as final tax on the income of the shareholder arising from the issuance of bonus shares. Relevant changes are proposed in sections 168 and 169 to mark it as final tax and disallow tax credits.
Critics argue that bonus shares do not increase the resources of recipients as they do not require any payment of consideration. They contend that bonus shares are simply an accounting treatment, resulting in diluted earnings per share for ordinary equity holders.
Past amendments regarding the tax on bonus shares have been disputed in superior courts. However, the Sindh High Court, in Suit 1764/2014, upheld the validity of the amendment made through the Finance Act 2014.
It is important to note that the mechanism proposed by the introduction of this new section in the Income Tax Ordinance may give rise to disputes under the Companies Act 2017, as relevant changes have not been made to that Act.
READ MORE: Banks to Collect 0.6% Tax on Cash Withdrawal from Non-Filers
The reintroduction of the tax on bonus shares has sparked concerns among investors who believe it could discourage companies from issuing bonus shares, which have been a popular way of rewarding shareholders in the past. Market experts will be closely monitoring the impact of this measure on the stock market and investor sentiment in the coming months.
