New tax on stock dividend to be effective from next FY

Staff Correspondent | Published: 00:00, Aug 19,2019

 
 

The new taxes imposed on listed companies’ stock dividend declaration and retained earnings will be applicable on the entities’ income for the current fiscal year 2019-20 with effect from next FY 2020-21.

Income tax wing of the National Board of Revenue recently issued the Income Tax Circular-1 (Paripatra) explaining the tax measures for FY2019-20.

It said that the two newly-adopted provisions regarding imposition of tax on the listed companies’ stock dividend declaration and retained earnings would be effective from the income year (FY2019-20) related to the fiscal year 2020-2021 which was also considered as tax year.

The Finance Act 2019 which was passed in parliament on June 29 read that if the amount of stock dividend declared by any company exceeded the amount of its cash dividend (or without declaration of any cash dividend), tax might be payable at the rate of 10 per cent on the whole amount of stock dividend declared in an income year.

Besides, a listed company could transfer 70 per cent of its net profits in a financial year to its reserve and retained earnings, and the rest 30 per cent would be distributed among its shareholders as dividend. But, if it fails to do so, it must pay 10 per cent tax every year on the amount transferred to reserve and retained earnings, the Finance Act said.

NBR officials said that the fiscal year of the companies whose accounting year ended in June, 2019 would be 2019-20 which meant that those companies need not pay taxes for financial disclosures.

But, the companies whose financial year will end between July-December 2019 will pay taxes for declaring stock dividends and increasing reserve in accordance with the finance act.

In general, most of the listed companies’ financial year ends on June 30 in the country.

But, financial year of banks, insurance and non-bank financial institutions ends in December 31 while the financial year of multinational companies is aligned with their parent companies.

If a bank, for example, declares 15 per cent stock dividend without cash dividend or cash dividend less than the stock dividend for the year end December 31, 2019, the bank must pay 10 per cent tax for the declaration.

However, if a company declares 15 per cent per cent stock dividend without cash dividend or cash dividend less than the stock dividend for the year end June 30, 2019, the company will not need to pay 10 per cent tax for the declaration.

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