Corporates demand to restore exemption on ICD

ISLAMABAD: Industries and business groups across the country have demanded the government to restore exemption on inter-corporate dividends (ICD), as it was leading to double taxation and discouraging companies to freely go for expansion or set up other units, industry officials said.

While explaining the burden of the additional tax, they said that if in a typical group, where multiple companies were created for different business, there was one textile unit, after earning profit it paid 29 percent tax and after declaring dividend it paid 15 percent tax to its parent company.

The trail of taxes does not end here. The same cement company paying dividend has to pay another tax of 15 percent to its holding company until it reaches the individual shareholder. In Pakistan, the framework of taxation of holding company structure was introduced in Income Tax Ordinance, 2001 through Finance Act 2007 and 2008 including exemption on ICD.

This was based on the recommendation of a task force formed by the federal government comprising of members from the then CBR, SECP, Pakistan Business Council, ICAP and senior tax professionals.

The task force was assigned the objective to give recommendations with the aim to consolidate fragmented corporate ownership.

It was to promote corporate governance and good corporate practices, as well as enhance capital formation within the country, attract investments, specially providing opportunities to small investors to take equity interest in large businesses.

In 2016, during the previous government’s tenure, clause 103A of Part I of Second Schedule of ITO, 2001 which provided exemption to ICD income among group companies, was abruptly removed without any consultation with stakeholders, said the industry sources.

This amendment had severely impacted the corporate sector, which had transformed themselves into holding company structures, while also resulting in unnecessary litigations for the businesses.

In 2019, after constant representations by business community, PBC and OICCI for more than three years with FBR and Finance Ministry, the present government reinstated the tax exemption for ICD. But this reinstatement was short-lived as again in March 2021, the ICD tax exemption was removed as part of IMF programme negotiations.

In the current global perspective, developing nations including our regional peers, such as India, Thailand, Sri Lanka, Azerbaijan, Vietnam, Turkey, Brazil, Argentina etc and developed countries such as USA, UK, Germany, China, France, Australia, Japan etc. have allowed tax exemption on inter corporate dividends.

The recent representations by the business community via PBC, OICCI and other forums to restore ICD exemption in the upcoming Federal Budget 2021 has received positive response from the FBR and Finance Ministry.

The reinstatement of ICD exemption would restore investor confidence and play a crucial role in ensuring government vision of consistent tax policies, promote economic activity and employment generation, said an industry official.