ISLAMABAD: The government has rejected a proposal of the Reforms and Resource Mobilization Commission (RRMC) to impose a tax on the companies’ reserves from the next fiscal year (2023-24).
However, there are speculations in the federal capital that Finance Minister Ishaq Dar will be considering imposing 5-10 percent tax on the reserves of the companies to better balance the budget.
A leading tax expert said that this has been a common practice by the finance minister to impose tax on reserves of the companies, which were not distributing dividends.
The tax was first time imposed through the Finance Act, 1999, under Section 12(9) A of the repealed Income Tax Ordinance, 1979. This tax was part of the repealed Income Tax Ordinance 1979 and was applicable on the companies’ reserves.
Second, the tax was again imposed through Finance Act 2015 under the substituted section 5A (tax on undistributed reserve) of the Income Tax Ordinance 2001. The section 5A (tax on undistributed reserve) was abolished through the Finance Act, 2017.
The tax expert said that the proposed tax may be applicable on the unapproved profits and un-distrusted reserves. The tax may be called as “deemed dividend”.
This time the government wanted to tax the reserves at the rate of five percent, he added. He said that there is a tax on the dividend and if a company did not pay dividend, the finance minister would ask them to pay other taxes at the rate of five percent, the tax expert said.
Under the deleted section 5A (tax on undistributed reserves) of the Income Tax Ordinance 2001, a tax shall be imposed at the rate of 10 percent, on every public company other than a scheduled bank or a modaraba, that derives profits for a tax year but does not distribute cash dividends within six months of the end of the said tax year or distributes dividends to such an extent that its reserves, after such distribution, are in excess of 100 per cent of its paid-up capital, so much of its reserves as exceed 100 per cent of its paid-up capital shall be treated as income of the said company, the deleted section added.
Copyright Business Recorder, 2023