The Pakistan Stock Exchange (PSX) has formally submitted proposals to the government for the upcoming federal budget 2025-26, with a strong recommendation to review and revise the current tax treatment of bonus shares. The exchange argues that the prevailing taxation framework is detrimental to the growth and vitality of the country’s capital market.
In its detailed budget recommendations, the PSX highlighted that classifying bonus shares as taxable income has become a disincentive for listed companies contemplating their issuance.
Historically, under the Income Tax Act, 1922, bonus shares were not considered income as shareholders did not realize any tangible gain upon receiving them. The PSX underscored that this view aligns with international tax norms, which generally recognize bonus shares as merely a reclassification of a company’s reserves rather than a distribution of income.
The issue of taxing bonus shares first emerged with the Finance Act, 2014, which introduced a 5% tax rate by categorizing them as “Income from Other Sources.” However, this measure was subsequently withdrawn through the Finance Act, 2018, following persistent advocacy by the PSX, which successfully demonstrated that the tax was hindering bonus share issuances without yielding significant government revenue.
A new provision, Section 236Z, was reinstituted in 2023, once again bringing bonus shares under the tax net by deeming them as income subject to a 10% withholding tax. The PSX contends that this move has had a discernible negative impact on the market. Supporting this claim with statistics, the exchange noted that between July 1, 2022, and June 30, 2023, 53 companies announced bonus shares amounting to Rs. 31.4 billion (at face value). In stark contrast, only 12 companies announced bonus shares valued at Rs. 24.8 billion between July 2023 and January 2025, illustrating a significant decline.
The PSX further emphasized that taxing bonus shares not only impedes the growth potential of already listed entities but also poses a considerable obstacle for unlisted companies considering public listing as a means of expansion. Issuing bonus shares is often a crucial step for companies to strengthen their capital base, and the existing tax burden is making this route less attractive.
Reiterating its core argument, the PSX submission clarified that bonus shares do not represent real income for shareholders as there is no inflow of funds or assets. It is fundamentally an internal accounting adjustment of a company’s reserves. Therefore, imposing a tax on such an adjustment is fundamentally flawed and contradicts the underlying principles of tax legislation.
To foster a more conducive environment for capital market development and restore investor confidence, the PSX has strongly recommended that the government repeal the amendments introduced through the Finance Act, 2023, specifically calling for the withdrawal of clause (29) of Section 2 and Section 236Z from the Income Tax Ordinance, 2001.
