The State Bank of Pakistan (SBP) has strongly proposed that the five percent tax on bonus shares should be withdrawn in budget (2018-19). The budget proposals of the SBP for 2018-19 revealed that the company issuing bonus shares is responsible for collection of tax on bonus shares. These amendments were made through the Finance Act 2014, in definition of term "income" under the Income Tax Ordinance, 2001 [section 2(29)] and by inserting two new sections [236M & 236N] provided collection of 5 percent tax on bonus shares. The said provisions should be withdrawn, SBP proposed.
The SBP said the company issuing bonus shares had been burdened with the obligation to collect advance tax, before issuance of bonus shares. "If shareholder does not deposit tax, shares equal to five percent shall be transferred to CDC account in the name of Federal Board of Revenue (FBR). These provisions need reconsideration inter alia for the following: While issuing bonus shares there is no consideration payable to the shareholder by the company.
It is not a cash transaction rather it is capitalization of retained earnings of the company to enhance the capital of the company. No payment in cash is involved. The issuance of bonus share increases number of shares and market capitalization, which results in enhancing of trading activity at stock exchanges as explained above."
"Due to levy of withholding tax on bonus shares, companies are more inclined to issue cash dividend in place of bonus shares. This would restrict the increase of capitalization and would be harmful for the growth of stock exchanges and economic activity. Pakistan Stock Exchange has also observed that issuance of bonus shares, after levy of withholding tax on issuance of bonus shares, is significantly decreased. Moreover, this also leads to expatriation of funds from the country in form of cash dividend," SBP added.