Listed companies: SECP for revising tax regime on undistributed reserves

The Securities and Exchange Commission of Pakistan (SECP) has proposed Federal Board of Revenue (FBR) to revise tax regime on undistributed reserves of listed companies in budget (2017-18). Sources said that the SECP has discussed the proposal with the budget markers of the FBR regarding tax on undistributed reserves.
According to the SECP, the concept of tax on undistributed reserve has been re-introduced through Finance Act, 2015. Previously, similar tax was introduced through Finance Act, 1999 which remained effective till promulgation of Income Tax Ordinance 2001. Now under section 5A, a tax @10% is imposed on the excess reserves of a listed company that derives income during a tax year but does not distributes cash divided or distribute cash dividend to an extent that after distribution reserves are in excess of 100% of paid-up capital.
Section 5A however does not apply to a company that distributes profits equal to either 40% of after tax profit or 50% of paid-up capital, whichever is less; is a bank, modaraba, a govt. owned company or a company exempt under clause 132, part 1 of second schedule of the of Income Tax Ordinance 2001 ie power producers. Since July 2015, 419 companies distributed profits however only 26 companies were subject to tax under section 5A due to aforementioned exclusions, SECP said.
Out of the total 419 companies, 63 companies have Rs 42 billion paid-up capital but Rs 716 billion equity therefore these were not subject to section 5A despite paying cash dividend less than 40% of after tax profit as they paid dividend 50% . Such companies are proposed to be made subject to tax if 40% of after tax profit or 50% of shareholder's equity, whichever is less, is not distributed. (net profit after tax-NPAT was Rs 130 billion last year).
Such companies will either pay tax on undistributed reserves, capitalize reserves by issuing bonus shares or pay more cash dividends, SECP proposed. In case of no or lessor distribution, a tax @10% will be charged on undistributed reserves. Based on historical data of total reserves of these companies, a tax upto Rs 63 billion can be charged.
In case of issuance of bonus shares, an additional tax @ 5% on sponsors shares plus CGT on half of free float shares will be generated which is estimated to be Rs 17.8 billion based on historical data. In case of payment of cash dividends, an additional tax @12.5% will be generated on amounts of dividends which is estimated to be Rs 2 billion based on historical data, SECP added.