Pakistan’s business community is up in arms against a recently introduced tax on bonus shares. The Pakistan Business Council (PBC) has urged the government to scrap this provision entirely in its upcoming budget proposals.
What’s the Issue?
The controversy surrounds Section 236Z of the Income Tax Ordinance, 2001, introduced by the Finance Act 2023. This section mandates companies to withhold a 10% tax on the value of bonus shares issued to shareholders.
Why the PBC Opposed?
The PBC argues that this tax is unfair and discourages investment for several reasons:
- Tax on Face Value vs. Market Value: The tax is calculated on the fair market value of bonus shares, which are typically issued at a much lower face value. This creates an unequal burden on shareholders.
- Bonus Shares Aren’t Income: Bonus shares don’t represent actual income for shareholders. They simply reflect a division of existing company value into more shares. Taxing them as income is fundamentally flawed.
- Reduced Tax Revenue: The PBC believes the tax will ultimately hurt government revenue. Previously, bonus shares weren’t taxed when issued, but the full sale price was subject to capital gains tax at higher rates. With the 10% withholding tax, the cost price for capital gains calculation increases, potentially leading to lower overall tax collected.
Impact on Businesses and Investors
The PBC’s concerns highlight a potential negative impact on the business climate:
- Disincentivizing Investment: Companies may be less inclined to issue bonus shares, a common practice for rewarding shareholders, if it comes with a significant tax burden.
- Reduced Shareholder Value: The tax could ultimately decrease the value of shares in the eyes of investors, hindering investment and growth.
Looking Ahead: Will the Government Listen?
The PBC’s recommendations will be a key point of discussion as the government finalizes the 2024-25 budget. Whether they choose to remove Section 236Z or find a compromise solution remains to be seen.
