ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has asked Federal Board of Revenue (FBR) to reduce withholding tax on dividend, abolish withholding tax on bonus shares, reduce tax rate on Non-Banking Microfinance Companies (NBFCs) and reduce withholding tax on Modarabas from 8 to 3 percent in budget (2024-25).
The budget proposals of the SECP received here at the FBR Headquarters revealed measures to facilitate corporate sector and ease of doing business.
The SECP has proposed reduction in withholding tax on dividend. The corporate businesses profits are taxed twice; once at company level @ 29% and on dividend distribution @15%. Equality of tax regime will promote corporatization culture leading towards documentation and will therefore generate more tax revenue.
SECP releases guide to facilitate Modaraba Companies, Modarabas
The withholding tax on bonus shares not be collected from collective investment scheme (CIS), real estate investment trusts (REITs), voluntary pension scheme (VPS) etc. The section 236Z was introduced in Finance Act (2023-2024). After the introduction of this section withholding tax is being deducted on bonus shares issued by the company. The FBR is not issuing exemption certificate with respect to issuance of bonus shares on the plea that there is no provision.
With this amendment the SECP believed that the FBR may issue exemption certificates with respect to 236Z also. The revenue impact is neutral, but the existing law is creating unnecessary advance tax which is not recoverable.
The SECP has also proposed that lower tax rates enable Non-Banking Microfinance Companies (NBMFCs) to offer more affordable financial services to their clients, promoting financial inclusion and making services accessible to a larger segment of the population.
The NBMFCs typically operate on thin margins, and a reduced tax rate contributes to their overall operational sustainability. It allows them to allocate more resources to client-centric initiatives and technological advancements. With a reduced tax burden, NBMFCs can focus on sustainable social impact, channelling resources into poverty alleviation, financial education, and community development initiatives.
A reduced tax rate for NBMCs contributes to their financial sustainability, encourages sector growth, and supports their mission of providing affordable financial services to underserved populations.
The SECP has proposed that the bonus shares not to be treated as income. The present treatment of bonus shares as income of the shareholder is very detrimental to the growth of the capital market and has hampered the issuance of bonus shares by listed companies. During the period i.e. from July 01, 2022 to June 30, 2023, a total of 53 listed companies announced bonus shares amounting (at Face Value) to over Rs31.4 billion, whereas, for the period July 01, 2023 to February 29, 2024, only 04 listed companies announced bonus shares amounting (at Face Value) to over Rs 446 million as a result of which the government has not fetched significant revenue under this head rather the GOP has lost an anticipated CGT due to trading on such increased number of shares had the same quantum of bonus shares were also issued this year as well, SECP added.
The SECP has asked the FBR that the withholding tax on Modarabas to be reduced from 8 percent to 3 percent, at par with many other services. The Modaraba faces withholding deduction @ 8% on payment made by customer against rental of machinery. The withholding rate under section 153(1)(b) shall be brought down to3% i.e. in line with the withholding tax on services. The 8% withholding tax rate works out to a net taxable profit margin of 32% which is on a very high side.
Copyright Business Recorder, 2024
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