Reports of the Reform and Revenue Mobilisation Commission’s (RRMC) proposal to tax accumulated reserves of companies has left the country’s corporate sector scrambling, as several listed entities have called on Extraordinary General Meetings (EGMs).

Companies representing various sectors including textiles, cement, insurance, steelmaking, automobiles are now holding these emergency meetings to contemplate their next move as the government, desperately seeking revenue, mulls increasing taxation on the country’s formal sector.

Some companies are looking to increase authorised share capital, while a few have already announced doing so.

“To increase the authorised share capital of the Company from Rs220,000,000 divided into 22,000,000 ordinary shares of Rs10 each to Rs1,500,000,000 divided into 150,000,000 ordinary shares of Rs10 each and consequent amendments to the Memorandum and Articles of Association of the Company, subject to the approval of members of the Company,” read a notice from Kohat Textile Mills Limited on Tuesday.

A similar statement was floated by others including Saif Textile Mills Limited, Suraj Cotton Mills Limited, and Kohinoor Mills Limited.

However, this was not limited to the textile sector only.

“To increase the authorized share capital of the company from Rs500,000,000 to Rs7,000,000,000 by creation of 650,000,000 new ordinary shares of Rs10/- each and consequent alterations in the Memorandum and Articles of Association,” read a notice from Atlas Battery Limited, engaged in manufacturing and sale of automotive and motorcycle batteries & allied products, on Tuesday.

This comes at a time when the government eyes an ambitious Rs9.2 trillion tax revenue target for 2023-24, a 20% year-on-year growth from 2022-23 budgeted numbers.

Given the enormous tax revenue target, the government is contemplating the imposition of new taxation measures in the upcoming budget.

One of the proposals is to impose a tax on the undistributed profits (reserves) of corporates to the tune of 5% for listed companies and 7.5% for unlisted companies.

As the proposed tax is recommended as an Advanced Tax, if implemented, the recommended tax on accumulated profits would be adjustable against tax on actual dividend distribution.

However, a recent report by brokerage house JS Global stated that the proposal is likely to be challenged in the courts if made part of the Finance Bill 2023.

“Companies have been building their reserves over the years. They cannot directly convert these reserves into authorised capital. For this purpose, the EGMs are being called,” Sana Tawfik, an analyst at Arif Habib Limited (AHL), told Business Recorder.

“When the authorised capital is increased, the number of shares is also increased, which are then floated as bonus shares to shareholders. This would increase the holding of the shareholder,” she said.

“However, this would not have an impact on shareholder value,” she added.

Meanwhile, a market expert on condition of anonymity said the EGMs are aimed at protecting the companies from the proposed reserve tax.

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

Shabbar Zaidi, a former chairman of the Federal Board of Revenue, in his article for Business Recorder said the tax on reserves is not a tax on the company’s income.

“It is a tax on the income of shareholders,” he wrote in his article titled, ‘Tax on undistributed reserves is ultra vires–I’.

“It is the income of the shareholders which at the moment is lying with the company. Whenever it is distributed, it will be taxed.

If tax is levied on undistributed reserves, then whenever such reserves are distributed these will be again taxed as dividend (double taxation) unless there is a provision for tax credit when distributed.

The simple question is whether minority shareholders, whose interest is being cited to levy this tax, would agree to double taxation? In other words, this tax is tantamount to taxing income that has not been received.