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FBR introduces new concept of tax on undistributed profits

FBR introduces new concept of tax on undistributed profits

ISLAMABAD: Federal Board of Revenue (FBR) has said that a new concept of tax on undistributed profits has been introduced for tax year 2017 and onwards.

In Income Tax Circular No. 04 of 2017, the FBR explained tax on undistributed profits under Section 5A of Income Tax Ordinance, 2001.

The FBR said that a tax on undistributed reserves was introduced vide the Finance Act, 2015 whereby a company, other than a scheduled bank or a modaraba, which did not distribute dividends within 6 months of the end of the Tax Year or distributed dividends to an extent that its reserves, after such distribution, exceeded 100 percent of its paid up capital was subject to tax at 10 percent.

However, this tax was not to apply to a public company which distributed either 40 percent of its after tax profits or 50 percent of its paid up capital within six months of the end of the financial year.

“This provision has been further amended through the Finance Act,2017 whereby the tax on undistributed reserves has been substituted by a new concept of tax on undistributed profits for the Tax Year 2017 and onwards,” the FBR said.

The Finance Act, 2017 stipulates that every public company barring a scheduled bank or a modaraba shall be subjected to tax at 7.5 percent of its accounting profit before tax if it fails to distribute a least forty percent of its after tax profits in the form of cash or bonus shares within six months of the end of the tax year.

The basis of levy of such tax, is therefore solely dependent upon the extent to which a public company distributes/disburses its after tax profits.

This tax is applicable from the Tax Year 2017.

As in the case of earlier tax on undistributed reserves the tax on undistributed profits too, shall remain inapplicable in the case of power companies and State Owned companies.