Imposition of 10pc WHT on sale of shares: Expert identifies ‘serious’ legal flaws in proposed provision of bill

ISLAMABAD: There are serious legal flaws in the proposed provision of the Finance (Supplementary) Bill, 2023 on imposition of 10 percent withholding tax at the time of sales of shares of the companies.

Top Chartered Accountant and former chairman Federal Board of Revenue (FBR) Shabbar Zaidi told Business Recorder on Saturday that it is practically impossible for the acquirer to determine a fair market value at the time of transaction. This is a completely absurd law where a buyer is being required to substitute the consideration to a fair market value if it is not so. The consequences, which arise on account of withholding a sum less than required, are serious therefore this absurdity has to be removed.

At present transactions for sale of shares of unlisted companies are not subject to withholding tax by the acquirer. An amendment has been proposed in Section 37 of the Ordinance which requires a withholding tax by the acquirer for an amount equal to 10% of the consideration, he said.

10pc WHT imposed on sales of shares for documentation

Shabbar Zaidi explained that the consideration for sale is deemed to be the fair market value as laid down in Section 101A of the Income Tax Ordinance. In the proposed bill subsection (4) has been referred which appears to be an error. The relevant provision is subsection (5) of Section 101A of the Ordinance.

The law as framed is not properly worded. It states (6) the person acquiring a capital asset, being a share of a company, shall deduct advance adjustable tax from the gross amount paid as consideration for the shares at the rate of ten percent of the fair market value of shares which shall be paid.

This provision is inherently improper for the reason that fair value has been defined as value of asset without liability whereas consideration will always be after taking into account the liabilities. Under the general law the WHT cannot be specifically more than the amount at which the ultimate seller is taxable. In this case, the situation arises on account of determination of fair value without taking into account the liabilities.

Furthermore, it is practically impossible for the acquirer to determine a fair market value at the time of transaction.

Secondly, if the provisions of this section are read with Section 75, 76 and 77 of the Ordinance, which are common principles, there cannot be any mandatory substitution of consideration to the fair value of assets.

This provision has been introduced for capital assets being shares of unlisted companies. This provision is in addition to an already existing provision under Section 152(2) of the Ordinance which applies to cases where the payment is made to a non-resident for the sale of shares. It therefore means that this provision will only apply to cases where the seller is a person being a person resident in Pakistan.

There is a need to clarify the status of this provision in relation to Section 101A of the Ordinance where certain shares of companies outside Pakistan are deemed to be assets located in Pakistan under subsection (3) of Section 101A of the Ordinance. If this provision is treated to be applicable to such shares then the rate has effectively been reduced to 10% from existing 20 percent, Shabbar Zaidi added.

Copyright Business Recorder, 2023