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Under the Income Tax Ordinance, 2001 income tax is charged on income of a person without any consideration to the ultimate beneficial ownership, hence tantamount to double taxation.

A group of say 500 people pool their resources to form a company A - beneficial owners. Company A commences business and generates profit of say Rs 10 million substance over form is that this profit of Rs 10 million belongs to the group of 500 people being beneficial owners.

Sponsors and investors of any company, be it private or public, listed or unlisted are entitled to get return on investments made by them.

Companies make profit that can either be distributed as cash/bonus dividends or retain to reinvest.

Companies are required to pay taxes based on taxable income computed after incorporating various provisions of Income Tax Ordinance, 2001 and in accounting terms it has to disclose following under Companies Act, 2017:

• Profit before tax

• Taxation

• Profit after taxation


• Cash dividend

From the above nomenclature it can easily be extracted that dividends are subject to tax twice or thrice.

• Firstly, dividends paid out of profits that has been taxed at 29%, normal tax rates for Companies;

• Secondly, in case where the company is a holding company than its dividend income from its subsidiaries or associated companies are again taxed;

• Thirdly, this dividend is again taxed being income of shareholders, currently 15%.

In other words, we can say that if shareholders, being beneficial owners, decides to pay out cash dividends, their earnings are taxed twice. Firstly, when company pay taxes on its earnings. Secondly, when the shareholders (same beneficial owners) receive the dividends, which come from the company's after-tax earnings. Dilemma is that shareholders (beneficial owners) pay taxes first as owners of a company that brings in earnings and then again as individuals on their own personal dividend earnings. At times, there is a third leg as well, and it occurs when company receives dividends from its investee company.

This does tantamount to double/triple jeopardy and therefore demands serious innovation.


  1. Cash dividends in the hand of recipients should be tax-free; or

  2. Companies, while computing taxable income shall be allowed to treat dividend paid to its shareholders as expenses to arrive at taxable income. Its impact will be 29%; or

  3. The total amount of tax paid on account of dividend shall be allowed as admissible expense to arrive at taxable income. Its impact will be in excess of 15% as it has both filers and non-filers.

In the current situation, second proposal seems to be the ideal one. Cash Dividend distributed by Companies should be allowed as an admissible expense in the following year. Dividend for June 30, 2021 will be announced and paid in following financial year therefore the same shall be allowed as an admissible expense when computing taxable income for the year ended June 30, 2022.

This is because that dividends are no more an adjusting event and Income Tax Ordinance, 2001 also do not allow provisions, therefore dividends can only be allowed as an admissible expense in the year of payment.

In this way, we can avoid double taxation on single income of same beneficial owner.


a) Attracts Article 13 of the Constitution of Pakistan;

b) Equality and Justice;

c) Beneficial ownership is same for the amount of dividend distributed;

d) Substance over form is that the same persons are being taxed twice on single income generated;

e) The Income of shareholders are being taxed twice and in some cases thrice and tantamount to double/triple jeopardy;

f) Tax incidence on beneficial owners come to 39.65% (29%+15% on dividend). Company A, PBT is Rs 10 million, its Tax will be 29% Rs 2.9 million and if it distributes Rs 7.1 million as cash dividend than beneficial owners will be taxed at minimum 15% on dividend, assuming all filers, Rs 1.065 million, making a total of Rs 3.965 million;

g) Cash outflows of Companies for operational activities and to generate revenues are considered as admissible expenses, even purchase of fixed assets though, amortised over number of years (in form of depreciation) will always be considered as admissible expenses;

h) Interest or financial charges paid on loans are also admissible expenses under the Income Tax Ordinance, 2001. The interest expense of Companies is income of banks/financial institutions which are taxed accordingly;

i) Similarly, salaries given to employees by companies are admissible expenses, just because salaries are income of employees on which employees are taxed separately;

j) Generally all expenses, such as printing, stationary, telephone, medical, travelling, etc., are admissible expenses. Needless to mention that all of these expenses are basically income of service providers on which service providers are taxed separately; and

k) Even tax is treated as an expense and distribution is from after tax profits.

(The writer is a fellow member of Institute of Chartered Accountants of Pakistan with 25 plus years of experience in Modaraba sector and a member of PSX Stockbrokers' Association)

Copyright Business Recorder, 2021


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