KARACHI, March 1: The government’s decision to withdraw tax on bonus shares was received with cheers at the Karachi Stock Exchange on Friday, though the celebrations were diluted over the latter part of the notification, which went on to say that “income on bonus shares would remain payable under the normal law.” Chairman KSE Salim Chamdia, who issued a statement informing members about the withdrawal of tax, could not be reached late in the evening for comments, but some other brokers and analysts agreed that the notification read as a whole got to be a bit “confusing”. Most people, however, agreed that withholding tax on bonus shares — which in the first place had made little sense — appeared to have been finally scrapped. It was vide the federal budget 2002, that bonus shares were decreed to be treated as dividend income in the hands of recipients, and taxed at 10 per cent.
The public and corporate outcry against the tax was joined by the KSE, which pleaded for the removal of the levy on several occasions, including on December 29 at the ‘top companies’ award distribution ceremony. The investors’ urgings intensified after key companies, including the Sui twins, skipped bonus issues this year. Engro Chemical, which announced results for the year ended December 31, 2001 last month, also decided not to tie its higher-than-expected cash dividend of 35 per cent with a bonus — a recurring feature of several years. And the company publicly expressed ‘disappointment’ at the levy of 10 per cent withholding tax, which it termed was ‘unfortunate’.
The KSE then went on to explain that the trend by companies to omit bonuses was retarding capital formation and investment.
It was pointed out that bonus issues were in line with the government’s own policy of self-reliance to promote capital growth instead of dependence on debts.
In the face of the levy, companies that could not pay cash dividends due to cash flow problems and had in the past, opted for stock bonuses to placate the shareholders, had to do without the either. But some banks, insurance companies and others that were constrained to issue bonus shares to raise their paid-up capital, were faced with a singular problem of collection of tax from shareholders.
Where the stock bonus had been tied with cash dividends, it was possible for companies to deduct tax from cash dividends. But companies had to face irate stockholders, where they had simply announced the bonus issues and asked shareholders to pay withholding tax on such bonuses.
Shareholders, in such cases, naturally felt short-changed since they had received no cash in cash dividends. All that explains why the KSE chairman made all the right noises on Friday, in appreciation of the government’s move to restore the tax exemption on bonus shares. Though what took the government so long to withdraw a thoughtless move, would remain an unanswered question.
