KARACHI: The Finance Bill 2014 has proposed justified amendments to the provision of taxation of bonus shares where the amount of bonus declared by a company would be treated as income of the shareholder and be chargeable to tax under the head income from other source.
It is due to resolve disputes, as appeals against the assessment raised denying exemptions which are in pending at different appellate forms.
According to budget 2014/2015 brief issued by KPMG Taseer Hadi & Co, Chartered Accountants, any income derived by a collective investment scheme or REIT scheme qualify for exemption on distribution of 90 percent of accounting income for the year reduced by capital gain etc.
It is witnessed that a dispute arose whereby the distribution of profits through bonus shares was challenged by the tax authorities for the purpose of determining 90 percent threshold in order to qualify for exemption of income. The appeals against the assessments raised denying exemption are pending at different appellate forms.
Due to the reason, the Finance Bill proposes to amend the provisions pertaining to taxation of bonus shares including in the following manner:
It is proposed that bonus shares received by a shareholder to be treated as income the term “income” defined in section 2(29) includes any amount chargeable to tax under this ordinance and subject to collection or deduction of tax under sections 148, 150, 152(1), 153, 154, 156, 156A, 233, 233A and 234(5) and any amount treated as income under any provisions of the ordinance or loss of income. However, the amount representing face value of any bonus shares or the amount of bonus declared, issued or paid by a company to shareholders, with a view to increase its paid up share capital, was excluded from the ambit of “income”.
Resultantly, the amendments proposed in the bill, the bonus shares or the amount of bonus declared by a company will be treated as income of the shareholder and would be chargeable to tax under the head “income from other sources”.
In withholding tax on bonus shares the Finance Bill has proposed that every person issuing bonus shares to the shareholders of the company shall collect tax at the rate of 5 percent of the value of bonus shares determined on the basis of day-end price of the first day of the closure of books. The company issuing the bonus shares shall be required to make arrangements for collection of such tax. In case of default the said company shall be liable to pay the tax not so deducted without prejudice to any other liability under the ordinance.
The tax so collected shall be treated as final tax on the income of the shareholder of the company arising from the bonus shares or bonus.
It said that in taxation of collective investments scheme, income of collective investments scheme or REIT scheme is exempt from tax, if 90 percent of its accounting profits for the year, as reduced by capital gains, is distributed amongst the unit or certificate holders or shareholders etc.
The Finance Bill proposes that for the purpose of determining distribution of 90 percent threshold, income distributed through bonus shares, units or certificates as the case may be, shall be excluded from the accounting income.