Many publicly traded firms have started hinting at distributing dividends and bonus shares in the guise of expanding their “authorized share capital” to avoid losses from the government’s newly proposed taxes on corporate reserves.
Finance czar Ishaq Dar’s Reform and Revenue Mobilisation Commission (RRMC) wants to levy income tax at the rate of 5 percent for listed companies and 7.5 percent for non-listed companies on their distributable reserves. The RRMC suggested taxing reserves as an advance tax on dividends to be paid by companies to shareholders in the future.
But companies at the Pakistan Stock Exchange (PSX) have noticed, and have decided to take action.
From what we’ve seen so far, many companies are announcing board meetings for either dishing out big payouts or increasing share capital to make room for bonus shares. While bonus shares aren’t subject to taxes, dividends get taxed at a rate of 15 percent.
Assistant Vice President at JS Global Waqas Ghani told ProPakistani,
Notices by listed companies have started to pour in, announcing increases in share capital from the latter half of the outgoing week after the proposal of tax imposition on distributable reserves of listed and non-listed companies by the reforms commission surfaced. Market expects that the companies are planning to announce dividends and bonus issues to lessen the impact of any possible tax implications.
Research suggests total reserves of public companies are above Rs. 5 trillion and could be as high as Rs. 6.5 trillion. The reserves of non-listed companies are valued at roughly Rs. 2.6 trillion.
Based on these estimates, a 5 percent tax on the reserves of listed companies could have a revenue impact of over Rs. 300 billion for the Federal Board of Revenue. Meanwhile, tax revenue from non-listed firms would generate Rs. 197 billion at a rate of 7.5 percent.
Either way, the government wins by generating more cash for state coffers. Companies on the other hand could suffer, particularly small enterprises that require hands-on cash for expanding operations.
So far, Searle Company Limited (SEARL), Maple Leaf Cement Factory Limited (MLCF), Adamjee Insurance Company Limited (AICL), Nishat Mills Limited (NML), Tariq Glass Industries Limited (TGL) and Gul Ahmed Textile Mills Limited (GATM) have announced to increase their authorized share capital.
Urgent board meetings have been called by Kohinoor Textile Mills Limited (KTML), Premium Textile Mills (PRET), Bhanero Textile Mills (BHAT), Faisal Spinning Mills Limited (FASM), Blessed Textile Limited (BTL), Service GlobalFootwear Limited (SGF), Service Industries Limited (SRVI), Gharibwal Cement Limited (GWLC), Sapphire Fibres Limited (SFL), Reliance Cotton Spinning Mills Limited (RCML), Sapphire Textile Mills (SAPT), and Tata Textile Mills Limited (TATM).
More companies will announce emergent board meetings in the coming days and could declare the issuance of bonus shares going forward. Aftershocks as a result of such announcements could hamper PSX trends as the financial year approaches close.