Govt Unlikely to Impose Tax on Companies’ Reserves

The government is not ready to pass the biggest revenue generation measure of over Rs. 8 billion of Reforms and Resource Mobilization Commission (RRMC) to impose a tax on the companies’ reserves from the next fiscal year (2023-24).

The RRMC has proposed an advance tax on the undistributed reserves of both listed and unlisted companies. For other than listed companies, a tax rate of 7.5 percent has been proposed.

Whereas, for listed companies, a tax rate of 5 percent has been proposed. This tax shall be adjustable, for the shareholders, against the tax on actual dividend distribution made by the Company in the future.

There is no likelihood that the proposal would be cleared by the present economic team, sources told ProPakistani.

The tax was first time imposed through the Finance Act, 1999, under Section 12(9) A of the repealed Income Tax Ordinance, 1979. This tax was part of the repealed Income Tax Ordinance 1979 and was applicable to the companies’ reserves.

Second, the tax was again imposed through Finance Act 2015 under the substituted section 5A (tax on undistributed reserve) of the Income Tax Ordinance 2001. The section 5A (tax on undistributed reserve) was abolished through the Finance Act, 2017. This time the government wanted to tax the reserves at the rate of 5-7.5 percent.

Under the repealed section 5A (tax on undistributed reserves) of the Income Tax Ordinance 2001, a tax shall be imposed at the rate of 10 percent, on every public company other than a scheduled bank or a modaraba, that derives profits for a tax year but does not distribute cash dividends within six months of the end of the said tax year or distributes dividends to such an extent that its reserves, after such distribution, are in excess of 100 percent of its paid-up capital, so much of its reserves as exceed 100 percent of its paid-up capital shall be treated as income of the said company, the deleted section added.

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