Govt looks to tap into undistributed reserveswith proposed advance tax in FY24 budget

ISLAMABAD: The government is considering imposing an advance tax of 5 percent and 7.5 percent respectively on un-distributed reserves for both listed and unlisted companies in the upcoming fiscal year 2023-24 budget, with the intention of generating an estimated Rs337.9 billion in tax revenue.

The Resource and Revenue Mobilization Commission (RRMC), which supports this proposal, presented its report to Minister for Finance Ishaq Dar. The commission suggests that the tax on undistributed reserves should apply to both listed and unlisted companies.

According to preliminary assessments, listed companies have amassed reserves of Rs2.8 trillion without paying dividends over the past three years. If the proposed 5 percent advance tax is implemented, the Federal Board of Revenue (FBR) could collect Rs140.4 billion in taxes from these listed companies.

FBR data reveals that the total reserves of companies amount to Rs5.44 trillion, with listed companies accounting for approximately Rs2.8 trillion. This implies that unlisted companies hold reserves of around Rs2.63 trillion. By imposing a 7.5 percent advance tax on these unlisted reserves, the FBR could collect an additional Rs197.514 billion, resulting in a total estimated tax amount of Rs337.941 billion.

It is important to note that proposed tax would be adjustable for shareholders against future tax liabilities on actual dividend distributions made by the company, RRMC said.

In addition to the proposed tax on undistributed reserves, the RRMC recommends imposing taxes on exporters who retain foreign exchange in anticipation of a devaluation of the Rupee against other international currencies.

The RRMC suggests entrusting the collection of this levy to the State Bank of Pakistan (SBP) since the FBR does not have access to the necessary details. However, the FBR has expressed opposition to this proposal, leaving the final decision to Minister for Finance Dar and the federal cabinet.

The RRMC has put forward several other tax-generating recommendations including amendment in the corporate law to require any business exceeding specific limits to be incorporated, with the limits potentially based on revenue, profit, or other benchmarks.

The RRMC also suggests increasing the tax burden on sole proprietors/AOPs (excluding professionals prohibited from incorporating) by 10 percent. Furthermore, the RRMC proposes raising the tax on non-corporate exporters from 1 percent to 8 percent to account for the dividends not paid by non-corporate entities compared to corporates. Withholding obligations would be applicable to all individuals conducting business, regardless of whether they operate through a company or otherwise.

Exemptions from withholding would be removed to address distortions in withholding regimes. The RRMC recommends automating Clauses (12) and (46AA), which currently exempt agricultural produce from withholding, to require electronic statements from those making payments and providing relevant details of those exempted from withholding. Additionally, Circular 4/2011, which exempts compliance on purchases through commission agents, would be withdrawn.

The RRMC proposes that every individual engaged in business or a profession should withhold tax under sections 152/153, except for Tier-1 retailers discharging their tax liability on electricity bills. Alternatively, a threshold of Rs100 million could be extended to small companies if the distortion is not addressed, ensuring a level playing field.

Regarding the tax on dividends, which currently stands at 25 percent for companies that have not paid any tax due to income exemption, business losses carried forward, or claiming tax credits, the RRMC suggests expanding the law to recoup a portion of the tax benefits received by exporters of goods/services who pay taxes at a reduced rate of 1 percent of turnover.

To ensure equitable treatment, the RRMC recommends higher tax rates on dividends for companies paying tax under the Final Tax Regime (FTR) for the export of goods/services.

The higher tax rates would be proportional to the FTR tax liability, with AOPs/individuals earning from the export of goods subject to an 8 percent tax, aligning them with companies earning through the export of goods/services and paying tax on dividends.