The Federal Board of Revenue (FBR) has turned down a proposal of Mutual Funds Association of Pakistan (MUFAP) for exemption of withholding tax deducted on bonus shares issued in respect of mutual funds in advance. A meeting of the Senate Standing Committee on Finance presided over by Senator Saleem Mandviwalla the other day was submitted a brief wherein it was stated that the MUFAP has claimed that there is an anomaly regarding withholding tax on issuance of bonus shares in respect of mutual funds.

The FBR further stated that as per the claim of the MUFAP, the income of the mutual funds is exempt from tax. Furthermore mutual funds are exempt from provisions of Sections 150, 151, 233 and Part I and Division VII of First Schedule where any person makes payment to it.

The meeting was informed that according to Sections 236M and 236N, bonus shares are taxable @ 5 percent of the specified value and the company which issues such bonus shares is obliged to withhold tax from shareholders. The MUFAP contends that bonus shares should also be exempt from section 236M, 236N (withholding taxes on bonus shares) of the Income Tax Ordinance, 2001.

According to the FBR official, income of a mutual fund is exempted if not less than ninety percent of its accounting income of that year as reduced by capital gains whether realized or unrealized and is distributed amongst the unit or certificate holders or the share holders.

The exemption status of mutual funds is determined only upon fulfillment of certain conditions such as distribution of 90 percent of accounting profit. Hence, the eligibility for exemption from income can only be determined once the return of income has been filed. As tax on bonus shares is deducted prior to filing of return ie prior to ascertainment of status of exemption, exemption from withholding taxes on bonus shares in advance cannot be granted, the FBR added.

Copyright Business Recorder, 2017