Sources told Business Recorder on Wednesday that the board in 2002 issued a clarification relating to the exemption of withholding tax on distribution of dividend among shareholders of Mutual Funds or collective investment scheme where tax was paid on capital gains. The board has sent this clarification to the Securities and Exchange Commission of Pakistan (SECP). After a period of over five years, the board has now informed the SECP and Director Generals, Large Taxpayer Units (LTUs), Karachi and Lahore to withdraw the clarification from July 1, 2007.
According to the instructions, Finance Ordinance 2002 clarification should be treated as withdrawn from July 1, it added. The sources said that now all dividend paid on the mutual funds would be taxable even though it arose from income of a mutual fund capital gains or from sale of share of a listed company, which are exempted from taxing up to June 30, 2008.
By virtue of clause 110 of Part-I of the Second Schedule, the FBR has withdrawn its earlier clarification of 2002 whereby such dividend was treated as exempt under clause 103 Part-I of the Second Schedule. However, this withdrawal would not have retrospective effect.
As a result of the wrong clarification, withholding tax from distribution of dividend by the NIT or mutual funds from 2006 to June 30, 2007 caused loss to the national kitty. Withholding tax at the rate of 10 percent has to be deducted on distribution of dividend/ interest among the shareholders. As these funds have not deducted the withholding tax from the shareholders, undue benefit has been passed on to the consumers, which is unrecoverable. The withdrawal of the wrong clarification prospectively does not allow the board to recover the loss to the national exchequer during 2002 to 2007.
The sources said that the FBR should have withdrawn the clarification retrospectively. Contrary to this, it was done from July 1, thus making the board unable to recover any amount involved during 2002-2007.
They said that it was a wrong clarification (2002) because clause 103 of Part-I of the Second Schedule specifically exempt those distributions received by a taxpayer from NTI or mutual fund where tax has been paid on capital gains arising to NIT or Mutual Funds as the case may be.
Since clause 103 and clause 110 are independent clauses and did not over right to each other, the correct interpretation of law is that each clause should be construed distinct from each other.
The clarification issued by the board in 2002 is patently incorrect interpretation of provisions of clause 113 and clause 110. The FBR has withdrawn the following clarification on Wednesday: Finance Ordinance 2002-clarification amendment in the Income Tax Ordinance and proposed amendment in the Zakat and Usher Ordinance.
"Reference is invited to SECP letter to July 15, 2002. The words in clause (103) of Part-I of the Second Schedule, 'capital gains on which tax has already been paid' would be applicable if tax on capital gains is leviable/chargeable. Clause (110) exempts "capital gains" from sale of shares of a public company etc and such exemption is available upto June 30, 2005.
Since the condition of payment of tax precedent for exemption to distribution of such capital gains among unit shareholders of Mutual Fund is not applicable uptill June 30, 2005, such distribution out of capital gains received by the taxpayers shall remain exempted from tax upto June 30, 2005".