KARACHI: The Federal Budget 2018-19 has introduced a number of income tax rationalization measures to provide relief to corporate sector and businessmen, which include gradual reduction in super tax and gradual reduction in corporate tax rate to 25 percent by 2023.
Presently the rate of super tax under section 4B of the Income Tax Ordinance, 2001 is 4.0 percent for banking companies and 3.0 percent for persons other then banking companies having income of Rs.500 million and above.
In order to encourage, incentivize and increase the competitiveness of companies and to enable them to contribute optimally towards economic growth, super tax shall be gradually withdrawn. It will be continued at the same rate for the financial year 2017-2018, however, the rate of super tax for both banking as well as non-banking persons shall be reduced by 1.0 percent for each successive year starting from the financial year 2018-19.
Presently under section 5A of the Income Tax Ordinance, 2001 public companies are obliged to distribute at least 40 percent of their after tax profits through cash or issuance of bonus shares within six months of the end of the financial year, failing which such companies are subjected to tax of 7.5 percent of their accounting profit before tax.
In order to create a balance between safeguarding the interest of shareholders as well as facilitating capital formation through retention of corporate profit earnings for future investments, the condition of distributing 40 percent of after tax profits is being reduced to 20 percent and the applicable tax rate on accounting profit in case of failure to distribute such dividend is being reduced from 7.5 percent to 5.0 percent.
Tax credit under section 65B is available to companies for the purpose of extension, expansion, balancing, modernization and replacement of plant and machinery at the rate of 10 percent of the amount invested.
Further, tax credit under section 65D is available to companies setting up a new industrial undertaking for a period of five years. Tax credit under section 65E is available to companies for the purchase and installation of plant & machinery through at least 70 percent new equity. The above tax credits can be availed by companies making investments up to June 30, 2019.
In order to incentivize investment and setting up of industrial undertakings /manufacturing concerns such tax credits are being extended for two more years up to June 30, 2021.
Presently, receipt of bonus shares is included in the definition of income and withholding tax under section 236M and 236N of the Income Tax Ordinance, 2001 is charged at 5.0 percent on the issuance of bonus shares to shareholders.
In order to encourage capital formation and enable companies to issue bonus shares in lieu of dividends to improve their liquidity, withholding tax on issuance of bonus shares has been withdrawn and receipt of bonus shares has been ousted from the definition of income under the Income Tax Ordinance, 2001.