ISLAMABAD: The government has imposed a 10 percent withholding tax at the time of sales of shares of the companies for documentation, enforce return filing and tax collection from the corporate sector in advance.
Official sources told Business Recorder that the FBR will not determine the fair market value of such shares. The provision was always there, but now we are asking to collect the tax in advance instead of annual filing of income tax returns or FBR is not aware of such transactions. The income tax rules already provide a detailed mechanism for the determination of the values of shares at the time of selling. But the payment in advance would force such persons to file returns. The change in ownership at the time of the transfer of shares has to be reported to the Securities and Exchange Commission of Pakistan (SECP).
There are many cases where returns are not filed. The tax is adjustable and can be adjusted at the time of filing of returns.
These shares are sold privately, but due to enforcement issues, the FBR will collect the tax in advance. This tax will be deduced on fair market value of the shares by the purchaser of those shares. Under the proposed Finance (Supplementary) Bill, 2023, the bill has proposed amendments in the Income Tax Ordinance, 2001.
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According to the bill, the person acquiring a capital asset, being shares of a company, shall deduct advance adjustable tax from the gross amount paid as consideration for the shares at the rate of 10 percent of the fair market value of the shares which shall be paid to the commissioner by way of credit to the federal government, within 15 days of the payment.
The value of shares shall be the fair market value, as prescribed for sub-section (4) of section 101A, without reduction of liabilities.
The Commissioner may, on application made by the person disposing of the shares, and after making such inquiry as the Commissioner thinks fit, allow to make the payment, without deduction of tax or deduction of tax at a reduced rate. The provisions of sections 161, 162, entry No 15 of the Table in section 182, clause (c) of sub-section (1) of section 191 and section 205 shall apply to the tax deductible and payable under this section. The person disposing of the capital asset, being shares of a company, shall furnish to the Commissioner within 30 days of the transaction of disposal, the prescribed information or documents, in a statement as may be prescribed: Provided that the Commissioner may, by notice in writing, require the said person, to furnish information, documents and statement within a period of less than 30 days as specified in the notice, Finance (Supplementary) Bill, 2023 added.
When contacted, Asif S Kasbati, FCA, FCMA and senior tax expert said that a new provisions has been introduced by the Finance (Supplementary) Bill, 2023 about collection of tax on disposal of shares being private limited; unlisted public companies and certain listed companies shares, mutual funds units and Sukuk Bond.
The new provisions about collection of tax on disposal of two types of shares being (a) private limited and unlisted public companies which could not be traded in stock exchange and (b) listed companies shares, mutual funds units and Sukuk Bond which are traded outside the registered stock exchange transaction of, which and which are not settled through the NCCPL.
Kasbati further added that the person disposing of the shares (however, bill inadvertently specifies deduction by the person acquiring shares) of the company, shall deduct advance tax from the gross amount paid as consideration for the shares at 10 per cent of the fair market value of the shares. The deducted tax shall be deposited within 15 days by the withholding tax agent. The value of shares, for the above purpose, shall be fair market value of share on the last day of the tax year, preceding the date of transfer of the share without reduction of liabilities. In case of capital gain exemption or reduced rate, the commissioner may, on application made by the person disposing shares, and after making such inquiry as the Commissioner thinks fit, allow to make payment, without deduction of tax or deduction at a reduced rate than the standard rate of 10 percent.
Kasbati indicated that in case of non-compliance, the deducting authority will be subject to default surcharge, assessee-in-default, penalty, prosecution, after proper opportunity of being heard.
The seller of the shares shall furnish to the commissioner within 30 days of the disposal on the statement to be prescribed. The Commissioner may ask to furnish further information in not less than 30 days. Kasbati opened that this will increase tax revenue due to no such anti-tax avoidance provisions in the past so far as withholding tax is concerned. Having stated this, he expects that proper implementation will be monitored for buyer and seller of shares, etc.
Copyright Business Recorder, 2023
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