Karachi Stock Exchange (KSE) in its budget proposals for 2015-16 has proposed the Federal Board of Revenue (FBR) that National Clearing Company of Pakistan Limited (NCCPL) should not withhold the Capital Gain Tax from those foreign institutional investors who are NTN holder and appearing on the Active Taxpayers List of FBR.
It is learnt that the KSE has submitted budget proposals for next fiscal year to the FBR. The proposals are related to the withholding tax on capital gains earned by non residents who are exempt under the double taxation agreement. According to the KSE, the draft amendments to Rule 13 of the Income Tax Rules, 2002 published through SRO 1021(1)/2014 dated 12th November 2014. An initial review indicates that there is an apparent contradiction in the provisions of sub-rules 2 and sub-rule 17 of Rule 13W as amended.
It can be seen that the Explanation in sub-rule 2 bars foreign institutional investors from seeking an exemption from withholding tax regardless of treaty provisions or any other reason. In other words they cannot opt out from the NCCPL scheme of taxation.
On the other hand, the second proviso to sub-rule 17 allows the Commissioner to grant approval to foreign institutional investors to opt out of the NCCPL scheme of taxation if the capital gains are exempt under a treaty.
It is therefore proposed that NCCPL should not withhold the Capital Gain Tax from those foreign institutional investors who are NTN holder and appearing on the Active Taxpayers List. This would avoid foreign institutional investors getting into a refund situation which in practice is very difficult to realise and creates embarrassing situation for all concerned, particularly as it creates a very bad image of the Pakistan Inland Revenue and the country as a whole, KSE proposal added.
KSE further proposed that under the present scheme of taxation that has prevailed in Pakistan and adopted from the Income Tax Act, 1922, the value of bonus shares or the amount of any bonus declared, issued or paid by a company to its shareholders was always excluded from the definition of "income" due to the reason that shareholder does not derive any income from the receipt of bonus shares. However, it is proposed in the Finance Bill 2014-15 that the value of bonus shares shall be taxable as "Income from other sources". The validity of the aforesaid concept is expected to be tested in the court of law and the case laws in Pakistan and in the comparative jurisdictions support the view that bonus share do not represent income under the Ordinance.
Moreover, the bonus shares issued does not increase the resources of that recipient against any payment of consideration, therefore it cannot be termed as income in the hand of recipient and distribution by the issuer resultantly applying a tax on such issue does not fall under the ambit of the Income Tax Ordinance, as it is merely an accounting treatment of reclassification of reserves of the issuing company, resulting in diluted earnings per share amounts for profit or loss to such ordinary equity holders.
KSE further understand that taxability of bonus share brought attention of taxation authority when it was observed that few of the Collective Investments Scheme distributed profits through bonus shares in order to comply with the provision of Clause (99) of the Second Schedule to the Ordinance, which was disputed by the tax department and exemption was denied. The Finance Bill has already proposed to amend Clause(99) by inserting proviso in Clause (99) of Part I of the Second Schedule; whereby for the purpose of determining distribution of at least 90 percent of accounting income, the income distributed through bonus shares, units or certificates as the case may be, shall not be taken into account.
Since the appropriate cognisance in respect of exemption to any income derived by a Collective Investment Scheme or REIT scheme under Clause (99) of Part I of the Second Schedule has already been taken care and the value of bonus shares, the amount of any bonus declared, issued or paid by a company to its shareholders is not "income" at all and it is just an accounting treatment.
It is also pertinent to submit that in the corresponding period ie from July to January, 51 companies announced bonus shares ranging from three percent to 183 percent of paid-up capital to their shareholders, whereas, in the current period only nine companies have announced bonus shares ranging from 10 percent to 40 percent. It is therefore proposed that the amendment made in Clause (29) of Section 2 and newly inserted section 236M of the Ordinance through the Finance Act 2014 may be withdrawn, KSE added.
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