Advance Tax on Accumulated Profits and Reserves of Companies in Pakistan

The Reforms and Revenue Mobilization Commission (RRMC) has proposed an advance tax on the accumulated profits and reserves of the companies in Pakistan in the coming budget for the fiscal year 2023-24. 

The Federal Budget for the year 2023-24 is to be announced on the 9th of June 2023. The imposition of the advance tax on the accumulated profits is under consideration by the Government as proposed by RRMC. 

A tax target of PKR 9.2 trillion has been set for the coming fiscal year which is twenty percent higher than the target of the current year. There is a shortfall of PKR 400 billion in the current year, which will further enhance the tax targets. To meet the target, the Government has several proposals under consideration for the coming year including the imposition of advance tax on the accumulated profits and reserves of companies. 

Rate of Advance Tax

The proposed rate of advance tax on accumulated profits is 5% for listed companies and 7.5% for unlisted companies. If the tax is imposed, it will be adjustable against tax on actually distributed dividends. 

Certain points regarding the imposition of the subject tax still need clarification such as the retrospective or prospective implication of the tax, the effective date of the tax, the capital structure of the company, dividend payout history, etc. 

Advance Tax on Un-distributed Reserves

It is also reported that the Government is considering reviving advance tax on accumulated/undistributed reserves at the rate of 10%. Previously, such advance tax was imposed by the FBR in the year 2017-18 on public companies other than the banks, modarabas, IPPs, and companies having government stakes of more than 50%. The tax was applicable on such companies that did not pay out at least 40% of earnings or 50% of the paid-up capital, by cash dividend or bonus shares within six months after the end of the respective tax year. The tax was challenged by the stakeholders i.e. the companies and was withdrawn. It is likely that the tax proposed now will be challenged like in the past by corporations. 

Pre-Emptive Action By the Companies

Certain companies have taken pre-emptive action to avoid or minimize the effect of the proposed advance tax by increasing the authorized share capital and issuing bonus shares to the shareholders. A number of companies have called extraordinary general meetings with the agenda of increase in the Authorized Share Capital and many others are likely to do similar action in the near future before the implication of the subject advance tax. The companies that have announced to enhance the authorized capital so far (up to 31st of May 2023) are detailed in the table below:

List of Companies that Announced Enhancement in Authorized Share Capital

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Disclaimer

The post is for educational purposes. The information has been gathered from direct sources, however, should not be referred to or used in any legal or official document. For any trading decisions, professional advice should be sought.