Bonus shares: Government misleads IMF on tax rate

Claimed levy of 10% tax that would generate revenue of Rs29b

ISLAMABAD:

Pakistan has apparently misled the International Monetary Fund (IMF) over the actual tax charged on the issuance of bonus shares, as collection from supposedly the biggest source of income tax in the year stands at a mere Rs1 billion.

As against the actual income tax rate of 5% on the value of bonus shares, the government has told the IMF that it levied a 10% tax, which will generate revenue equal to 0.1% of gross domestic product or Rs29 billion.

The claim was made in a Memorandum of Economic and Financial Policies (MEFP) which was submitted to the IMF, aimed at spelling out the government’s economic priorities under the IMF programme.



“A court stay has blocked 10% tax on the value of bonus shares, which was estimated to bring 0.1% of GDP,” reads the MEFP. The government informed the IMF that the court case has been resolved and it would collect the due tax.

During one of the meetings in March this year, Finance Minister Ishaq Dar insisted that the rate of tax on bonus shares was 10%. It is not the only issue where the government has misled the IMF. In the same report, the government claimed that it hired financial advisers in January this year for selling the Convention Centre building, located in Islamabad. In reality, no financial advisers or evaluator had been hired so far.

In the fiscal year 2014-15 budget, announced in June last year, the government had, for the first time, brought earnings from bonus shares under the ambit of income.

According to Section 236M, inserted in the Income Tax Ordinance in June last year, “every company, quoted on stock exchange, issuing bonus shares to the shareholders of the company, shall withhold 5% of the bonus shares to be issued.”

Before June 2014, the gains on bonus shares were exempted from income tax. At the time of the budget, the Federal Board of Revenue (FBR) claimed in front of the finance minister that in the previous fiscal year, Rs1.5 trillion worth of bonus shares had been issued. At the rate of 5%, it could have easily generated Rs75 billion, making it the largest source of revenue on the income tax side.

However, a stock market broker revealed to The Express Tribune that the Rs1.5 trillion bonus share figure was a bluff, as actual shares issued during financial year 2013-14 were far less than Rs400 billion.

On the budget day, the Ministry of Finance and Revenue told the federal cabinet that the government would generate Rs15 billion by charging 5% on the issuance of bonus shares, showed the official documents.

On this account too, the government has not shown the actual picture to the IMF by claiming that the tax would generate income equivalent to 0.1% of GDP.

Actual collection

By the end of the third quarter of current fiscal year, the FBR’s collection from bonus shares was just Rs1 billion, said a senior official of the board who spoke on condition of anonymity.

He said companies were not issuing bonus shares and instead paying dividends to their shareholders. The benefit of paying dividend is that it is subject to only 10% tax of the book value of the share. On account of 10% tax on dividends, the FBR bagged Rs18 billion by the end of March, higher by Rs2 billion or 12.5% over the comparative period’s collection, said the official.

Bonus share is not an earning, which is a major flaw in the government’s tax policy, said capital market analyst Khurram Schehzad, working with the Arif Habib Group.

“Commercial banks were the major issuers of bonus shares but after 5% levy I have hardly seen any bank giving bonus shares,” said Schehzad.

Published in The Express Tribune, April 21^st,  2015.

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