The tax on undistributed profits, which had been introduced in the Finance Act of 2017, will not be applicable beyond the tax year 2019.
The Finance Supplementary (Second Amendment) Bill of 2019 was presented in the National Assembly on Wednesday, bringing forth this noteworthy change in tax legislation.
The tax on undistributed profits, initially introduced through Section 5A of the Income Tax Ordinance, 2001, came into effect for the tax year 2017 and subsequent years. This tax was designed to encourage companies, particularly public companies, to distribute a portion of their profits to shareholders as dividends within a specified timeframe.
However, the latest bill aims to limit the application of this section, effectively discontinuing it after the tax year 2019. The modified Section 5A will read as follows once approved by the National Assembly:
Section 5A: Tax on Undistributed Profits.
Sub-Section (1): For tax years spanning from 2017 to 2019, a tax shall be imposed at the rate of five percent of the accounting profit before tax on every public company, with the exception of scheduled banks or modarabas, that derives a profit for a given tax year but does not distribute at least twenty percent of its after-tax profits within six months of the end of that tax year through cash:
Provided that for the tax year 2017, bonus shares or cash dividends may be distributed before the due date mentioned in sub-section (2) of section 118 for the filing of a return.
The decision to discontinue the tax on undistributed profits beyond the tax year 2019 represents a significant change in taxation policy. It is expected to have various implications for businesses and shareholders alike.
The tax on undistributed profits was initially introduced to incentivize companies to distribute profits as dividends to shareholders, thereby increasing liquidity in the market and stimulating economic activity. The requirement for companies to distribute a minimum of twenty percent of their after-tax profits within six months was seen as a means to benefit shareholders and improve corporate governance.
This tax was seen as a measure to encourage companies to share the wealth generated, rather than accumulating profits. It aimed to balance the interests of shareholders and the companies they invested in, while also potentially increasing government revenues through taxation.
However, with the proposed amendment to limit the application of this tax to tax year 2019 and prior years, companies may have more flexibility in managing their retained earnings and profits. This change could have implications for their dividend distribution policies and financial strategies.
For shareholders, this development may affect their expectations regarding dividends and the income they receive from their investments. Companies could have the option to retain more of their earnings for various purposes, such as reinvestment, debt reduction, or other corporate initiatives.
It is important to note that the proposed amendment will need to be approved by the National Assembly before it becomes law. If approved, it will be interesting to see how companies and investors respond to the change in tax policy and how it impacts their financial decisions and strategies moving forward.
