Tax on dividends is a tax levied by the government of Pakistan on the income earned from dividends received by shareholders of companies in Pakistan. Dividends are the portion of profits distributed by a company to its shareholders, usually in the form of cash or stock. In this article, we will provide an overview of the tax on dividends in Pakistan, including its definitions and examples.
Definition of Tax on Dividends
The tax on dividends is a tax levied by the government of Pakistan on the income earned from dividends received by shareholders of companies in Pakistan. This tax is levied on both resident and non-resident individuals, as well as companies.
Examples of Tax on Dividends in Pakistan
To better understand tax on dividends in Pakistan, let’s take a look at a few examples:
Example 1:
Mr. Ahmed is a resident individual who owns 1,000 shares in XYZ Corporation. The company declares a dividend of PKR 10 per share. Therefore, Mr. Ahmed will receive a total dividend of PKR 10,000 (1,000 shares x PKR 10 per share). According to the tax laws in Pakistan, Mr. Ahmed will be required to pay tax on his dividend income at the rate of 12.5%. Therefore, his total tax liability will be PKR 1,250 (12.5% of PKR 10,000).
Example 2:
ABC Corporation is a company that operates in Pakistan. The company declares a dividend of PKR 1,000,000 to be distributed among its shareholders. According to the tax laws in Pakistan, the company will be required to withhold tax on the dividend at the rate of 12.5%. Therefore, the company will deduct PKR 125,000 (12.5% of PKR 1,000,000) from the total dividend amount and distribute the remaining PKR 875,000 among its shareholders.
Example 3:
DEF Corporation is a non-resident company that owns shares in XYZ Corporation in Pakistan. The company receives a dividend of PKR 500,000 from its investment in XYZ Corporation. According to the tax laws in Pakistan, DEF Corporation will be required to pay tax on the dividend at the rate of 20%. Therefore, its total tax liability will be PKR 100,000 (20% of PKR 500,000).
Procedure for Payment of Tax on Dividends
The procedure for payment of tax on dividends in Pakistan is as follows:
If you are a shareholder receiving a dividend, you will be required to pay tax on the dividend income at the rate of 12.5% for resident individuals and companies, and 20% for non-resident individuals and companies.
If you are a company distributing dividends, you will be required to withhold tax on the dividend at the rate of 12.5% for resident individuals and companies, and 20% for non-resident individuals and companies.
The tax withheld by the company will be deposited with the Federal Board of Revenue (FBR) within 7 days of the end of the month in which the dividend was distributed.
The shareholder can claim credit for the tax paid on the dividend income in their annual tax return.
Penalties for Non-Payment of Tax on Dividends
The penalties for non-payment of tax on dividends in Pakistan are as follows:
If a company fails to withhold tax on the dividend, a penalty of 100% of the tax due will be imposed.
If a company fails to deposit the tax withheld to the FBR, a penalty of 1.5% per month of the outstanding amount will be imposed.
If a shareholder fails to pay tax on the dividend income, a penalty of 10% of the amount due will be imposed.
It is important for companies and shareholders to pay their tax on dividends on time to avoid penalties and interest charges. Additionally, failure to pay tax on dividends can also result in legal action by the tax authorities.
Final Thoughts
Tax on dividends is an important tax payment system in Pakistan that ensures the government receives its share of income from dividends earned by companies operating in Pakistan. It is important for shareholders to be aware of their tax liabilities and for companies to withhold and deposit tax on dividends in a timely manner to avoid penalties and legal action.
If you have any questions or concerns about tax on dividends in Pakistan, it is recommended that you consult a tax expert or a professional tax consultant who can provide you with detailed information and guidance on the matter.