Tax travails

Federal Finance Minister Muhammad Ishaq Dar has committed to reviewing the proposal of levy of tax of 10 percent on "undistributed revenues" of public companies, which are in excess of 100 percent of paid-up capital if the same is not distributed within six months from the end of the tax year proposed. This proposal, in effect, is a reintroduction of a similar levy imposed by the Finance Minister in his earlier term (1999) in order to force companies to pay dividends to minority shareholders. It is meant to be a safety valve to encourage savers to invest and receive a return on their investment by way of dividend.
This tax is chargeable on reserves created after due payment of tax on income on the entire undistributed accumulated reserves. When a similar levy was imposed under the 1979 Ordinance the government had to clarify that in the past it was only related to income for the year and was not applicable where distribution was lower than 40 percent of the profit for the year or 50 percent of the paid-up capital. Further, taxing companies in the current financial year of FY15 means retroactive imposition of this levy - which not only is a bad practice, it is also liable to legal challenge. What about those companies which have already closed their books and finalised their accounts as of December 31, 2014? Thus there is a case of a sympathetic review since the Finance Bill 2015 contains a half-baked proposal.
There are two courses available for capitalisation of reserves. If reserves are more than 100 percent of paid-up capital, which may be the case in old companies then they are liable to tax. The other course is bonus shares, which can be issued in case of liquidity of the company does not permit distribution of cash in case of expansion or high receivables outstanding. In both courses, boards of directors need the flexibility of exercising one or the other option.
Why should be there any holding period for capital gains? Whenever the gain is accrued to an assessee only then it needs to be taxed. The rate of tax can be lower and fixed say at 12.5 percent. After all, share is a share whether it is ordinary, or obtained as a bonus or through a right issue. If the share is sold - then it should be liable to tax. We do not need to ape others but do need to be cognisant of our own ground reality. Let there be ample liquidity in the capital market. Let the free float of the bourse rise so that daily volumes of traded shares rise to a point where no individual or group is able to dictate. Let the day trader return and pay a nominal tax it is better to tackle distortions and go after those who do not provide taxable receipts instead of making life difficult of those who do pay their dues. Harassing taxpayers is only forcing non-taxpayers to stay away. And, a higher tax rate as a withholding tax will not induce them to be part of the documented economy when they can pass the higher rate of tax as a cost to the consumer. Non-taxpayers need to be provided an incentive to become taxpayers with no questions on the past transactions being asked. Only then will they step forward and share their dues that they owe to the nation.
Let the FBR have a working relationship with banks; it should not force banks to collect withholding tax on their behalf on all banking transactions. The size of deposits that FBR is looking at (taken from SBP numbers) needs to be minimised through induction of liquidity in the banking system by SBP and interest payments made by banks. Only then will a realistic picture of rise in bank deposits emerge. Obviously, SBP has to inject the liquidity in to the system to ensure settlement of transactions; if it was not so why would banks with ample liquidity need to borrow from SBP? Let us not turn the whole country into Sutar Mandi of Faisalabad. Banking secrecy needs to be ensured for banks to strengthen the financial system of the country. It is, therefore, needless to argue that depositors must have confidence in the safety and secrecy of their deposits.