PBC conveys to Tarin: Exemption withdrawal from ICD to go against govt’s objective

ISLAMABAD: The Pakistan Business Council (PBC) has categorically conveyed to the Finance Minister Shaukat Tarin that the withdrawal of exemption from the Intercorporate Dividends (ICD) would directly go against the objective of the government to promote investment in Pakistan.

According to a letter of the PBC received at the Federal Board of Revenue (FBR) here on Wednesday, the PBC want to clear a misunderstanding on the legislative history of ICD in Pakistan and to share, once again, the many global precedents of exemption of such dividends from taxation when paid by one company to another.

We are also clarifying that post the recent change in the Indian tax law, the ICD is not subject to tax in the hands of another company, provided it in turns declares a dividend of at least the same amount within the stipulated time period.

Taxation laws for Group Companies were incorporated in Pakistan tax laws in 2007 based on the recommendations of the Task Force formed by the federal government (comprising of the then CBR, SECP, ICAP, and private sector).

The underlying objective was to promote Holding Company structures in Pakistan with the aim to consolidate fragmented corporate ownership, deepen capital markets, attract investors and inculcate best in class governance and corporate practices.

Exemption from tax on ICD was introduced via Finance Act 2008 through introduction of clause 103A in Part I of Second Schedule of the Income Tax Ordinance, 2001 (“ITO”). Subsequently, via Finance Act 2016, during the previous government’s tenure, exemption of ICD was abruptly removed for companies eligible under section 59B of the ITO. The said exemption was reinstated again in 2019 during the current government’s tenure through introduction of clause 103C in Part I of Second schedule of the ITO.

Recently in 2021, via Income Tax (Second Amendment) Ordinance 2021 clause 103C of Part I of Second Schedule has again regretfully been removed from the ITO.

The PBC urged the restoration of exemption of the ICD from tax at multiple stages.

Indian tax law acknowledges that dividend income must be taxed only in the hands of individual shareholders once and the flow of dividends between corporates is not subject to tax.

As per the Indian taxation laws (Section 80M of the Indian Income Tax Act, 1961), dividend received by a domestic company is exempt from tax to the extent that dividend received is distributed by the recipient company to its shareholders, the PBC stated. The way that dividend income is taxed in India has undergone several changes over the years.

In 1997, India introduced the Dividend Distribution Tax (DDT) regime, wherein, dividend income was exempt in the hands of the shareholders but the company paying the dividend was required to pay DDT at a flat rate (irrespective of the tax rate applicable to respective shareholders).

In 2020, India has now introduced the classic system of taxing dividends in the hands of the final individual shareholders and exempted ICD from taxation.

Under both the regimes, dividend income was not taxed when paid from one company to another.

The PBC has also carried out an assessment of the taxation treatment of the ICD in major developing and developed countries.

The majority of jurisdictions do not impose a minimum shareholding like Pakistan.

Hence, the ICD regime introduced by the FA 2008, continued till 2016, then reinstated in 2019 was already less liberal than the global practice.

The PBC would like to reiterate that removal of clause 103C of Part I of Second Schedule of ITO goes directly against the objective of the government to promote investment in Pakistan.

Copyright Business Recorder, 2021