The Federal Board of Revenue (FBR) has proposed that unit holders for Real Estate Investment Trust (REIT) would be treated at par with the unit holders of mutual funds and dividend be subjected to same tax rates of 25 percent if received by companies and 10 percent for recipient individuals.
According to the Finance Bill (2015-16), first-ever Rental REIT has been formed comprising two major commercial rental properties. Therefore, the rates of dividend paid to the unit holders of REIT are to be introduced, because at present no special regime for unit holders of REIT has been prescribed. Since the Mutual Funds have similar structure, it is proposed that unit holders for REIT be treated at par with the unit holders of Mutual Funds and dividend be subjected to same tax rates of 25 percent if received by companies and 10 percent for recipient individuals.
Presently, tax rate of 35 percent is applicable to banking companies from all sources except income from dividend which is taxed at various rates from 10 to 25% and income from capital gains which is taxed at a rate of 10 and 12.5 percent. This arrangement discriminates between different sources of income for banks and creates a disincentive for the banks to focus on their primary business of normal lending. In order to encourage banks to focus on their normal lending business, rate differential for different sources is proposed to be removed with effect from Tax Year 2015.
The present rate of tax of 10 percent on dividend income is on the lower side as compared to most other countries. It is proposed that the rate be increased to 12.5 percent. Consequently, in case of non-filers the rate of tax is proposed to be increased from 15 percent to 17.5 percent of which 5 percent shall continue to be adjustable. For Mutual Funds the existing rate of 10 percent shall continue.
In order to persuade public listed companies to distribute dividend which would encourage investment in stock markets, it is proposed that in the case of a listed company other than a scheduled bank or a Modaraba, which does not distribute cash dividends within six months of the end of the said income year or distributes dividends to such an extent that its reserves, after such distribution, are in excess of hundred percent of its paid up capital, the excess amount may be taxed at the rate of 10 percent.
At present most of the expenditure on internet usage is subject to 14 percent withholding tax in telephone bills and telephone prepaid cards. However, around 24 percent of usage is not being subject to tax as the same is not included in telephone bills and telephone prepaid cards. Therefore, it is proposed that the remaining 24 percent may also be subjected to withholding tax in similar manner.
It is proposed that the withholding tax deducted on services was changed from final tax to minimum tax on non-corporate taxpayers through amendment in Section 153 of Income Tax Ordinance through Finance Act 2009: However, it continued to remain adjustable in the case of Companies. Due to some ambiguity in the explanatory circulars issued with Finance Act, the matter has been under litigation. In order to clarify the matter a clause (79) was added to Part IV of Second Schedule of Income Tax Ordinance in 2011. However, the matter is still disputed regarding the preceding Tax Years, in particular by Federal Tax Ombudsman. In order to resolve the issue it is proposed that it may be clarified through a retrospective amendment that in the case of companies' tax withheld on services is not a minimum tax since Finance Act 2009, the FBR added.