Mohsin Siddiqui (Chief Reporter)
The Securities and Exchange Commission of Pakistan (SECP) has presented a series of budget proposals to the Federal Board of Revenue (FBR), aiming to reform the taxation structure in the upcoming budget for 2024-25. These proposals include reducing the withholding tax on dividends, abolishing the withholding tax on bonus shares, lowering the tax rate on Non-Banking Microfinance Companies (NBFCs), and reducing the withholding tax on Modarabas from 8% to 3%.
The SECP’s recommendations, received at the FBR Headquarters, are designed to facilitate the corporate sector and improve the ease of doing business in Pakistan. These measures are seen as critical steps toward fostering a more favorable business environment and enhancing economic growth.
One of the key proposals from the SECP is the reduction of withholding tax on dividends. Currently, corporate profits are subject to double taxation: once at the company level at a rate of 29% and again on dividend distribution at 15%. The SECP argues that reducing this tax burden would promote a corporatization culture, leading to better documentation and ultimately generating more tax revenue. The equalization of the tax regime is expected to encourage businesses to adopt corporate structures, thereby contributing to the formal economy.
The SECP has also called for the abolition of withholding tax on bonus shares, particularly for collective investment schemes (CIS), real estate investment trusts (REITs), and voluntary pension schemes (VPS). The introduction of Section 236Z in the Finance Act of 2023-2024 mandated the deduction of withholding tax on bonus shares issued by companies. However, the FBR has not been issuing exemption certificates for these bonus shares, leading to unnecessary advance tax collection, which is not recoverable.
The SECP believes that with an amendment, the FBR could issue exemption certificates under Section 236Z as well. This change would have a neutral impact on revenue but would eliminate the current inefficiencies and administrative burdens on businesses.
The SECP has proposed reducing the tax rates for Non-Banking Microfinance Companies (NBFCs) to enable them to offer more affordable financial services, promoting financial inclusion. NBFCs typically operate on thin margins, and a reduced tax rate would contribute to their operational sustainability, allowing them to allocate more resources to client-centric initiatives and technological advancements.
With a lower tax burden, NBFCs can focus on sustainable social impact, channeling resources into poverty alleviation, financial education, and community development initiatives. This move would support the growth of the sector and help in providing affordable financial services to underserved populations.
Another significant proposal from the SECP is to not treat bonus shares as income for shareholders. The current treatment of bonus shares as taxable income is detrimental to the growth of the capital market and has hampered the issuance of bonus shares by listed companies. From July 1, 2022, to June 30, 2023, 53 listed companies announced bonus shares amounting to over Rs31.4 billion at face value. In contrast, from July 1, 2023, to February 29, 2024, only four listed companies announced bonus shares amounting to over Rs446 million.
The SECP noted that this decline is due to the adverse tax treatment, which discourages companies from issuing bonus shares. By not treating bonus shares as income, the government could avoid the loss of anticipated Capital Gains Tax (CGT) that results from reduced trading volumes of such shares.
The SECP has also recommended reducing the withholding tax on Modarabas from 8% to 3%, aligning it with the withholding tax on other services. Currently, Modarabas face an 8% withholding tax on payments made by customers against the rental of machinery, resulting in a net taxable profit margin of 32%, which is considered excessively high.
