The Pakistan Stock Exchange (PSX) has formally requested the government to reinstate the tax exemption on inter-corporate dividends for companies that qualify for group taxation. The proposal is part of the PSX’s recommendations for the upcoming Federal Budget 2025-26, aiming to foster a more conducive environment for corporate growth and compliance.
In its budget proposals, the PSX has specifically called for the restoration of the tax exemption under Section 59B of the Income Tax Ordinance, 2001. This section pertains to dividends paid between companies within a corporate group. The PSX argues that removing this exemption has created an unfavorable tax landscape for corporate structures.
Rationale Behind the Recommendation
The PSX’s recommendation is rooted in the belief that reinstating the exemption will promote a fairer tax system and actively encourage corporatization in the country. According to the PSX, the current taxation of inter-corporate dividends undermines efforts to build a robust and transparent corporate sector. By allowing this exemption, companies operating within corporate groups would benefit from a tax treatment that encourages equality, potentially leading to improved documentation and a long-term increase in tax revenue.
To implement this change, the PSX has proposed a specific amendment to the Income Tax Ordinance, 2001. The suggested clause for inclusion in Part I, Second Schedule, clause 103C is:
“Dividend income derived by a company, if the recipient of the dividend, for the tax year, is eligible for group relief under section 59B.”
Addressing Double Taxation and Disincentives
The core argument presented by the PSX is that the current tax structure results in the double taxation of corporate profits. Profits are first taxed at the company level at the standard corporate tax rate (currently 29%), and then the distribution of these profits as dividends is subject to a further tax (currently 15%). This cumulative tax burden, exacerbated by the imposition of an additional super tax (up to 10% as per the Finance Act 2023) on high earners, acts as a significant disincentive for businesses to adopt and adhere to best practices of corporate governance.
Promoting Governance and Transparency
The PSX believes that exempting inter-corporate dividends would incentivize corporate groups to follow sound governance norms, enhance transparency in their operations, and ultimately contribute more positively to the overall economy. The removal of the exemption is seen as an unnecessary barrier for businesses striving to align with regulatory standards and improve their corporate structure.
