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Finance Ministry is said to have blocked a proposal of Privatisation Commission (PC) regarding exemption from double taxation on Benazir Employees Stock Option Scheme (BESOS) project with the argument that no tax exemption is now available after entering into Stand-by Arrangement with the International Monetary Fund (IMF), well-informed sources told Business Recorder.
The issue was submitted to the Economic Co-ordination Committee (ECC) of the cabinet in its previous meeting but the sponsoring Division withdrew its summary on the insistence of the Finance Ministry. "The Finance Ministry has promised to compensate PC on double taxation after the latter submits details of financial implications on the shareholders especially small shareholders," the sources added.
The ECC was apprised that the cabinet has approved BESOS for empowerment of employees of 80 State Owned Enterprises (SOEs)/other GoP shareholding by giving them 12 percent of government shares free of cost with buy-back at the time of leaving the service or on retirement of the employees at a pre-defined value.
The shares of respective entities will be transferred to a Trust which will assign units to employees on the basis of length of service and will entitle the shareholder to receive dividends, if any, from the date of applicability of the BESOS ie 14th August, 2009.
The distribution of dividends will be: (i) 50 percent of dividend received in cash or in kind by Trust will be distributed by the trustees to the employees; and (ii) balance 50 percent of the dividend received in cash or in kind by Trust will be transferred to the Privatisation Commission which will maintain central revolving fund for buy-back of units.
The ECC was further informed that an anomalous situation has arisen since under section 150 of the Income Tax Ordinance 2001, the entities are liable to deduct income tax at the rate of 10 percent while paying dividend to their shareholders. The Trust created under the BESOS, being a shareholder, will suffer a 10 percent withholding tax on any dividend that it receives.
Further, when the Trust distributes dividends to employees, tax will again be deducted at the rate of 10 percent under section 150 of the Ordinance. This will amount to double tax deduction first by the companies declaring the dividends and secondly at the time of distribution of dividend to employees by the Trust.
It may be clarified that the Privatisation Commission was exempted from the payment of any taxes in accordance with section 44 of the Privatisation Commission Ordinance, 2000. PC, in its summary, a copy of which is available with Business Recorder suggests that the dividend income of Trust established under the BESOS should be exempted from deduction of income tax as the Trust is holding shares on behalf of the GoP and it is a "pass through entity".
The sources said, ECC emphasised that the proposal should be reviewed with the objective of targeted relief to small shareholders. After detailed discussion and Finance Ministry's revelation that no exemption can be provided to any entity or department under the agreement with the IMF, the PC decided to withdraw its summary for submission of a revised proposal for targeted relief to small shareholders.

Copyright Business Recorder, 2009

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