Finance Act 2014: explanation to taxation on bonus shares

KARACHI: The Federal Board of Revenue (FBR) on Thursday issued explanation to Finance Act 2014 regarding amendments to taxation of bonus shares.
Relevant sections: clause (29) of Section 2, Section 39(I)(m), Section 236M and 236N of Income Tax Ordinance 2001.
The FBR said that prior to Finance Act, 2014, clause (29) of section 2 excluded bonus shares from the definition of income.
Finance Act, 2014, through legal fiction, has deemed issuance of bonus shares as income of the shareholder of the company, receiving bonus shares, by excluding the words “but does not include, in case of a shareholder of a company, the amount representing the face value of any bonus share or the amount of any bonus declared, issued or paid by the company to the shareholders with a view to increasing its paid up share capital” from section 2(29), the income deemed has been included under the head “Income from other Sources” under section 39(I)(m) of the Ordinance.
Two separate sections, namely 236M and 236N have been introduced which deal with bonus shares issued by companies quoted on stock exchange and those not quoted on stock exchange respectively.
Companies issuing bonus shares have been made responsible for collecting tax on the said deemed income, which is 5 percent of the value of bonus shares. Tax collected by the companies shall be a final tax on the income of the shareholder of the company arising from issuance of bonus shares.
Companies quoted on stock exchange, issuing bonus shares to the shareholders of the company, shall withhold bonus shares, at the rate of five per cent of the bonus shares to be issued. These bonus shares withheld shall only be issued to the shareholder if the company collects, within fifteen days, from the shareholder tax equal to five per cent of the value of the total bonus shares issued to the shareholder determined on the basis of the day-end price on the first day of closure of books.
In case of default, either on the part of the company or the shareholder, the company shall deposit the bonus shares withheld in Central Depository Company of Pakistan Limited or any other entity as may be prescribed. These bonus shares shall be disposed of in the mode and manner as may be prescribed and the proceeds thereof shall be paid to the Commissioner by way of credit to the Federal Government.
Companies not quoted on stock exchange, issuing bonus shares to the shareholders of the company, shall deposit tax, within fifteen days of the closure of books, at the rate of five percent of the value of the bonus shares on the first day of closure of books.
The company shall be entitled to collect and recover the tax deposited under sub section (1), from the shareholder, on whose behalf the tax has been deposited, before the issuance of bonus shares.
If a shareholder neither makes payment of tax to the company nor collects its bonus shares, within three months of the date of issuance of bonus shares, the company may proceed to dispose of its bonus shares to the extent it has paid tax on its behalf.
The proceeds of the bonus shares disposed of and paid under sections 236M and 236N, shall be treated to have been paid on behalf of the shareholder.

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