The Federal Board of Revenue (FBR) will impose a 5 percent withholding tax on all foreign non-resident shareholders (FNRS), who enjoy the benefit of Pakistan source dividend income, but do not file their income tax statements. The FBR has issued instructions to all Chief Commissioners of Large Taxpayer Units (LTUs) and Regional Tax Offices (RTOs) here on Friday, clarifying withholding of income tax on dividend in excess of tax liability of foreign non-resident shareholders.
The FBR has directed the Chief Commissioners to charge default surcharge and impose penalty on all such non-filers who enjoy Pakistan source dividend income and do not file statements under section 115(4) of the Income Tax Ordinance 2001. However, if the non-residents file their statements under Section 115(4) in time, they may get the opportunity to apply for refund.
According to the FBR, the reference has been given to the letter of Ashfaq Tola a leading Chartered Accountant wherein he has stated that non-residents having no permanent establishment (PE) in Pakistan and investing in Pakistan through Special Convertible Rupee Accounts are non-filers, therefore, they have to pay an extra deduction of 5 percent tax for being non-filers in view of the amendments to Section 150 of the Income Tax Ordinance (which provide different rates of WHT for filers and non-filers). As per Ashfaq Tola assertions, non-residents are being forced to file statements under Section 115 or face extra 5 percent withholding tax on dividend. The FBR said that attention is invited to sub-section (6) of Section 101, which deals with "geographical source of income" and provides that dividend shall be Pakistan source income if it is paid by a resident company. As section 5 of the Income Tax Ordinance, 2001 provides chargeability for the dividend income and sub-section (4) of Section 115 requires that any person whose income is subject to final tax under Section 5, ie, dividend (and several other sections as enumerated therein) is obliged to furnish the statement under Section 115 for the tax year in such form and verified in such manner as may be prescribed.
The FBR said that cumulative reading of above two provisions, ie, Section 5 and Sub-section (4) of Section 115 clearly indicates that NRs who are deriving Pakistan source dividend income are violating the provisions of Section 115(4) as per which they are legally obliged to file a statement (in lieu of return of income) as prescribed under the Income Tax Rules, 2002 and non filing of statements renders them liable to penalty and default surcharge as per Section 182. Therefore, the newly introduced provision of Section 150 (which distinguishes on tax rates between filers and non-filers) is in harmony with the existing provisions of law and is basically a tool to force such persons to fulfil their statutory obligation, hence requires no amendment. Right course as per law would be to charge default surcharge and to impose penalty on all such non-filers who enjoy Pakistan source dividend income and do not file statements under section 115(4). However, if the NRs file statements under Section 115(4) in time, they may apply for refund which may be expeditiously refunded on fast track basis, the FBR instructions added.
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