Treatment of bonus shares as income detrimental to capital market growth: PSX

Pakistan Stock Exchange (PSX) has said that 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.
The budget proposals of the PSX for 2016-17 revealed that under the present scheme of taxation that has prevailed in Pakistan and adopted from the Income Tax Act, 1922, the value of bonus shares or the amount of any bonus declared, issued or paid by a company to its shareholders was always excluded from the definition of income due to the reason that shareholder does not derive any income from the receipt of bonus shares.
Comparative jurisdictions also support the view that bonus do not represent income under the ordinance. However, the Finance Act, 2014 introduced tax on the value of bonus shares as income from other sources, PSX said.
It is also pertinent to submit that in the period, ie, from July 1, 2013 to June 30, 2014, 71 companies announced bonus shares amounting (at Face Value) to over Rs 19.1 billion, whereas, in the year 2014-15 only 17 companies have announced bonus shares and the government has not fetched significant revenue under this head. For the period July 1, 2015 to December 31, 2015, 11 companies announced bonus shares amounting (as Face Value) to over Rs1.4 billion.
Moreover, the bonus shares issued does not increase the resources of that recipient against any payment of consideration, therefore, it cannot be termed as income in the hand of recipient and distribution by the issuer resultantly applying a tax on such issue does not fall under the ambit of the ordinance, as it is merely an accounting treatment of reclassification of reserves of the issuing company, resulting in diluted earnings per share amounts for profit or loss to such ordinary equity holders.
PSX further understands that taxability of bonus share brought attention of taxation authority when it was observed that few of the collective investments. Scheme distributed profits through bonus shares in order to comply with the provision of clause (99) of the Second Schedule to the Ordinance. Since the appropriate cognisance in respect of exemption to any income derived by a Collective Investments Scheme or REIT scheme under Clause (99) of Part I of the Second Schedule has already been taken care and the value of bonus shares, the amount of any bonus declared, issued on paid by a company to its shareholders is not "income" at all and it is just an accounting treatment, PSX added.