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Market experts on Wednesday said the likelihood of the government imposing a tax on undistributed profits – reserves – is quite low, and will probably not be a part of the upcoming budget announcement.

The government, eyeing to attract Rs9.2 trillion tax revenue target for 2023-24, a 20% year-on-year growth from 2022-23 budgeted numbers, had reportedly been contemplating the imposition of a tax on accumulated reserves of companies in the budget set to be announced on June 9.

Among several measures proposed by the Reform and Revenue Mobilisation Commission (RRMC) was to impose the tax to the tune of 5% for listed companies and 7.5% for unlisted companies.

In response to the reports, dozens of companies representing various sectors including textiles, cement, insurance, steelmaking, and automobiles scrambled to hold emergency meetings.

However, on Wednesday, market players said the tax authorities are unlikely to implement the RRMC proposal due to “legal issues”.

The sources Business Recorder reached out to said they now believe the probability of this tax’s imposition is very low.

Many have already criticised the proposal that calls for taxing a sector that is contributing to government revenue already.

“The imposition of tax on reserves is illogical,” Fahad Rauf, Head of Research at Ismail Iqbal Securities, told Business Recorder.

The market expert said many companies have converted these reserves into property, plants and equipment. “So how could it be taxed again? Moreover, the incomes have already been taxed, which will lead to double taxation,” he said.

“The government has failed to broaden its tax base, thus it is burdening the already tax formal sector of the country,” he added.

The Ministry of Finance did not immediately respond to a request for a comment.

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Prof.Dr.Abdul Ghafoor Awan May 31, 2023 09:22pm
Tax imposition will force those companies who did not declare dividends for the last many years and accumulated earning. It will also benefit to small shareholders. Taxation is the only way to reduce income inequality in the society. The major shareholders are reaping financial and other benefits from retain earning and reserves while small shareholders are suffering due to non-declaration of dividends.
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Kashif ALI May 31, 2023 11:32pm
@Prof.Dr.Abdul Ghafoor Awan, This is one side of the coin which is rightly pointed out by you. The flip side is that taxing the reserve is akin to taxing the already taxed income of the companies. This is not justified. There are many ways to remedy the gross indifferent inequality meted out to small shareholders like you and me. The Companies Act must be equipped with new rule or clauses that would keep a check on such companies which don't dole out dividends despite earning handsome profits. LUCKY Cement is one such glaring example of Shareholder abuse where the company just does not care about sharing profits with its shareholders. The law could be such that will force companies to pay dividends and in case of non-payment, they will have to declare justification in writing in Board's MoM. That justification should be restricted to Business expansion or acquisition of business etc. (This is just one way of mitigating the issue).
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