Budget Taxation of bonus shares A company has the option to issue dividend or bonus shares to its share holders. In case of issuance of dividend, tax is deducted @ 10% in the hands of share holders but no tax is deducted or payable on issuance of bonus shares. This is due to the reason that bonus shares were excluded from the definition of income. However, tax on capital gain is to be charged at the time of disposal of these shares with cost equal to zero. Taking advantage of complex CGT rules (cost staggering, FIFO etc.), tax is being avoided and almost negligible CGT is being paid. During previous year, a huge amount of bonus shares were issued in lieu of dividends, however, neither tax on dividends nor on capital gains was received. It has therefore been proposed that bonus shares be treated as dividend and tax collected at the rate of 5% of the ex-bonus price of the shares. Revampng the exemption of mutual fund Mutual Funds are exempt from income tax if they distribute at least 90% of their income on the basis that these are only pass-through entities and earn income on behalf of investors. However,the Mutual Funds often distribute income through bonus units, and due to certain rules relating to taxation of bonus shares, almost no tax is paid on the income distributed by Mutual Funds. It has therefore been proposed that mutual funds be required to distribute income only in cash (as in case of Modarbas), which will be liable to withholding tax @ 10%. Increase in rates of tax deducted from advertising agencies Commission agents are taxed under Final Tax regime at the rate of 10% on commission paid. For advertising agents, the rate of tax is 5%. It has been proposed that 10% rate, as is applicable to other commission agents, be applied, to advertising agents as well.Adjustable advance tax on transfer of private vehicles up to five years It has been proposed that advance income tax be collected by Excise and Taxation Departments on transfer of private motor vehicles up to a period of 5 years. The rate of tax will be same as that for registration of a new motor vehicle and will be reduced by 10% in each of the subsequent years. Rationalization of rates of advance income tax on motor vehicles under section 234 Rates of adjustable advance income tax collected with Motor Vehicle Tax from private cars under section 234 were last revised in 2008. In order to account for inflation the rates are proposed tobe revised and brought closer to the tax collected by provincial motor vehicle authorities. In case of non-compliant persons (i.e., those who have not filed their return for the preceding tax year) the rate shall be double that for the complaint taxpayer. persons who do not file income tax returns on certain transactions. The rate of such advance tax is proposed to be 5% for dividend income, 5% for interest income above Rs.500,000, 0.2% for cash withdrawals from banks, and 0.5% in case of advance capital gain tax Adjustable advance tax on purchase of immovable at the rate of 1% of consideration paid on purchase ofimmovable property above Rs. 3 Million has been proposed. In case of non-compliant persons the rate of tax shall be 2%. Adjustable advance tax on first/club class international air tickets - tax at the rate of 3% on purchase of international air tickets in club/executive/first class has been proposed. In case of non-compliant persons (i.e., those who have not filed their return for the preceding tax year) the rate shall be six percent. Tax is deducted under Eighth Schedule in respect of securities defined in section 37A. However, debt securities are not included in this definition. In order to ensure deduction of tax on capital gains on debt securities, it has been proposed that debt securities be included in the definition of securities. However, companies shall be excluded from the application of section 37A under the Eighth Schedule. Alternative corporate tax To discourage perpetual declaration of losses or very low income using tax avoidance means by companies, an alternate corporate tax at the rate of 17% is proposed to be imposed on accounting income excluding the exempt income w.e.f Tax Year 2014. The companies shall have to pay ACT or corporate tax whichever is higher. In order to facilitate companies that have genuinely low income for some period of time, the ACT paid has been proposed to be carried forward up to 10 years. Rationalization of rates of tax deduction on services At present the rates for deduction of tax on services are 6% and 7% for corporate and Non- Corporate taxpayers respectively. Considering that persons providing or rendering services usually enjoy high profit margins due to low costs, and that the share of services sector in revenue is much lower than its share in GDP, the existing rates appear to be on lower side as compared to companies, salaried individuals and persons having business. Hence to rationalize, tax rates on services has been proposed to be increased to 8% in case of corporate taxpayers and 10% in other cases. Misclassification of income Taxpayers can earn income from Government Securities, Capital Gains, bank deposits, leasing etc. either directly or through modarabas and mutual funds. If income is earned through modarabas or mutual funds, its class and character is changed to dividend income and the rate of dividend is applicable to it. For example, if a bank and a public company invest directly in government securities, they will be taxed at 35% & 34% respectively. However, if the same investment is routed through a mutual fund, the bank and public company will be taxed at the rates of 25% and 10% respectively. This is due to the reason that character of income is changed from interest to that of dividend when the investment is through a mutual fund which is taxed at a lower rate. In order to discourage tax avoidance and prevent loss of revenue, it has been proposed that the rate be applicable to the dividend distributed by Mutual Fund and Modarabas as is closer to the rate of tax on nature of income received by Mutual Fund. However, to incentivize these sectors, the rate of interest income distributed to companies shall be 25% instead of 35%. Rationalization of Capital Gains Tax for sustaining buoyancy in capital markets Capital gain Tax shall stand increased from 10% to 17.5% w.e.f. 1 July 2015 in case of securities held for a period less than six months. Stock markets as well as investors were demanding to review such high increase in order to save the capital markets from withdrawal of investments and resultant collapse. In order to ensure continued buoyancy prevailing at present without causing a huge loss of revenue to exchequer, CGT rates have been rationalized. Now for the tax year 2015, rate of CGT has been proposed to be 12.5% for securities held up to 12 months and 10% for securities held for a period which is less than 24 months but more than 12 months.
Posted on: Wed, 04 Jun 2014 07:13:10 +0000
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