Inter-corporate dividend: FBR suggests change in taxation

The Federal Board of Revenue has proposed change in the taxation of inter-corporate dividend at the normal rate of 35 percent tax in Budget (2013-14). Sources told Business Recorder on Tuesday that it is merely a budget proposal drafted at the level of the Board, but yet to be approved by the policymakers. The proposal is part of the budget preparation exercise at the FBR level.
The Board has proposed taxation of inter-corporate dividend at the normal rate of tax chargeable to corporate taxpayers at 35 percent of dividend amount. Sources said that at present subject to provision of Income Tax Ordinance, 2001 a tax shall be imposed, at the rate specified in Division III of Part I of the First Schedule, on every person who receives a dividend from a company, while the rate of tax on dividend is 10 percent on gross amount of income earned on account of dividend. The said rate of 10 percent has been proposed to be enhanced at par with the corporate sector tax rate of 35 percent for inter-corporate dividend.
As per FBR proposal on taxation of inter-corporate dividend, currently, inter-corporate dividend is taxed at the rate of 10 percent which is a final tax-although intention of the law is ambiguously contrary to this practice. The inter-corporate dividend must be taxed at normal rate in the recipient company, the FBR proposal added. When contacted, a tax expert said that presently dividend declared by the company and received by a company as a shareholder is taxed at the rate of 10 percent. It is proposed that the companies receiving dividend should pay tax at the normal rate, ie, 35 percent. It has been estimated that the expected revenue could increase from Rs 10 billion to Rs 21 billion per annum in case any such proposal has been accepted.
Another FBR proposal is that the rate of tax on any amount representing distribution by a mutual fund or a private equity and venture capital fund out of its income from profit on debt be made chargeable to tax at the rate applicable to companies on their income from business.