SECP Proposes Reduction in Dividend Tax in 2024-25 Budget

SECP Proposes Reduction in Dividend Tax in 2024-25 Budget — In a significant move aimed at fostering a more equitable tax regime and encouraging corporatization, the Securities and Exchange Commission of Pakistan (SECP) has proposed a reduction in the tax on dividend income to 10 percent in the upcoming budget for 2024-25.

The proposal is part of SECP’s broader strategy to enhance the business environment and stimulate economic growth.

Currently, corporate profits are subject to double taxation, with a 29 percent tax at the company level and an additional 15 percent withholding tax on dividends distributed to shareholders. This results in a cumulative tax burden of 39.65 percent on dividend income, which SECP argues is considerably higher compared to the 0 to 35 percent tax range applied to unincorporated businesses.

In its budget proposal, SECP suggested that the total income tax, which includes the proportionate 29 percent tax paid by the company and the proposed 10 percent withholding tax on dividends, should be treated as Advance Income Tax. This would mean that the amount of dividend income, grossed up for the corporate income tax already paid, would be added to the recipient’s income and taxed at normal rates.

SECP’s proposal aims to address the current inequity in the taxation system, which it believes discourages corporatization and documentation. By reducing the tax on dividends, SECP hopes to provide a level playing field for both incorporated and unincorporated businesses.

“Equality of tax regime will promote a corporatization culture leading towards better documentation, which in turn will generate more tax revenue,” the SECP stated in its proposal. The organization emphasized that while the taxation of incorporated businesses should ideally be incentivized, at the very least, it should not be punitive compared to unincorporated businesses.

The proposed changes are expected to make the corporate sector more attractive, thereby encouraging more businesses to formalize their operations and contribute to the documented economy. This move is seen as a crucial step towards enhancing transparency, improving tax collection, and fostering economic growth.

As the government prepares to finalize the budget for the upcoming fiscal year, SECP’s recommendations are likely to spark considerable debate among policymakers, economists, and the business community. The proposal, if accepted, could mark a significant shift in Pakistan’s corporate taxation landscape.