Tax cut suggested on dividend paid by exempt entities

KARACHI: Federal Board of Revenue (FBR) has been urged to reduce rate of income tax on dividend from exempt entities as the higher rate of dividend effectively withdraws the benefit of exemption.

Pakistan Business Council (PBC) in its proposals for budget 2022/2023 submitted to the FBR, urged to reduce the dividend tax to 15 per cent on dividend received from exempt entities.

It said that tax of 25 per cent on dividends from exempt entities introduced via Finance Act 2019 (Division III of Part I of First Schedule) of the Income Tax Ordinance, 2001.

Through Finance Act 2019, rates of dividend taxation have been increased from 15 per cent to 25 per cent on dividends paid by entities whose income is exempt under the Income Tax Ordinance 2001.

The higher rate of dividend in such cases effectively withdraws the benefit of exemption or concession intended to be provided e.g., if Government intends to provide concession to SEZ than while providing corporate tax exemption at one end, higher tax incidence on its dividend reduces the benefit at other end.

Exemptions are associated with some economic objective and higher dividend rate will discourage such economic objectives, the PBC said.

It recommended that Clause (a) of Division III of Part I of First Schedule of Income Tax Ordinance, 2001 as applicable before Finance Act 2019, should be reinstated, to apply the rate of 15 per cent on dividend received from exempt entities.

Similarly, amendment be made for the withholding tax rates specified in clause (a) of Division I of Part III of the First Schedule, by reinstating the position prior to Finance Act 2019.

Earlier, the PBC recommended to reduce the further sales tax to one per cent in order to discourage flying invoices. The PBC said that at present, general rate of sales tax is 17 per cent and another 3 per cent further tax is also applicable incase supplies are made to unregistered persons.

The council said that further tax at 3 per cent incentivizes issuance of flying invoices by unscrupulous persons. In order to discourage issuance of flying invoices and to encourage proper reporting of sales, rate of further tax should be reduced down to 1 per cent or to maximum 1.5 per cent.

The PBC made this recommendation to document the economy and providing a level playing field for the formal sector.