Levies under FTR on exports: Higher tax rate on dividend recommended

ISLAMABAD: The Reforms & Revenue Mobilization Commission (RRMC) has strongly recommended a higher rate of tax on dividend if the company is paying tax under the Final Tax Regime (FTR) on export of goods/services.

According to the recommendation of the RRMC to the Ministry of Finance for budget (2023-24), the tax on dividend is levied at the rate of 25% where the company paying the dividend has not paid any tax due to exemption of income/carry forward of business losses/claim of tax credits under the Ordinance. The rationale behind the higher rate of tax appears to be recovery of the tax benefit available to the Company, albeit to a certain extent, from its shareholders.

Notwithstanding the merits of the above rationale, if the law is to be retained, it is recommended that the law should be further expanded to recover partial tax benefit accruing to exporters of goods/services paying tax at the reduced rate of 1% of turnover, which, in effect represents a profit margin of 3% if computed at the corporate rate of tax, RRMC maintained.

Govt likely to shift exporters from FTR to MTR scheme

Assuming a profit margin of 20 percent, a corporate tax at the rate of 29% and tax on dividend at the rate of 15 percent, the shareholders would receive 12% of the turnover which translates into an effective tax rate of 40%. If the company is entirely engaged in export of goods and does not derive revenue from any other sources, then shareholders would receive around 16% of turnover/effective tax rate would be 20 percent.

In view of this, a higher rate of tax on dividend is recommended if the company is paying tax under FTR on export of goods/services. Higher tax rates may be cascading/proportionate to quantum of FTR; for example, if the FTR tax liability is between 80%-100% of total tax liability of the company, then higher tax rate on dividend at 25% should be made applicable.

AoPs/individuals earning from export of goods should not be subject to 1% but at a higher rate of 8% to make them equitable to companies earning through export of goods/services and also paying tax on dividend, the RRMC added.

Copyright Business Recorder, 2023