Tax experts at A F Ferguson have provided insights into the reintroduction of tax on bonus shares through the Finance Bill of 2023.
They explained that prior to the amendments made by the Finance Act of 2014, the term ‘income’ as defined in section 2(29) of the Income Tax Ordinance, 2001, excluded the amount representing the face value of bonus shares for shareholders of a company.
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However, the Finance Act of 2014 introduced withholding provisions and a separate ‘final tax’ on bonus shares issued by both unlisted and listed companies. This change also eliminated the exclusion of bonus shares from the definition of income.
Despite judgments from higher courts in Pakistan and India stating that bonus shares were not considered ‘income,’ a legal challenge against this tax was dismissed by the High Court of Sindh. An appeal against this decision is currently pending before higher courts. Subsequently, the provision was omitted through the Finance Act of 2018.
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The Finance Bill of 2023 proposes to reintroduce the taxation measure by amending the definition of ‘income,’ expanding the scope of ‘income from other sources,’ and introducing a withholding tax provision (section 236Z), which will take effect from July 1, 2023.
Key features of these taxation measures include:
(a) Every company will be required to collect 10% tax from each shareholder at the time of issuing bonus shares. The tax rate for inactive taxpayers will be 20%.
READ MORE: Pakistan Imposes 10% Income Tax on Bonus Shares Issued by Companies
(b) The value for tax purposes will be determined as the equivalent of the day-end price on the first day of book closure for listed companies. For unlisted companies, a prescribed value will be used. It is expected that the Federal Board of Revenue (FBR) will issue necessary rules regarding this matter.
(c) The tax collected will be treated as final tax.
(d) In case shareholders fail to pay the tax, the company is required to dispose of shares to the extent of the tax liability.
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The reintroduction of tax on bonus shares through the Finance Bill of 2023 aims to broaden the tax base and generate additional revenue for the government. Companies and shareholders should carefully review and comply with the new withholding tax provisions to avoid any penalties or legal consequences. It is recommended to consult tax experts for proper guidance and understanding of the revised regulations.
