KARACHI: A dozen and a half companies listed on the Pakistan Stock Exchange (PSX) announced on Friday they’re going to hold board meetings for reasons other than financial results in the coming days.

Their apparent objective is to fend off the possible expense arising out of an advance tax that the government may impose in the 2023-24 budget on their reserves, which are retained profits from past years.

Newspaper reports suggest companies that have piled up undistributed earnings on their balance sheets may be asked to pay an advance tax — adjustable against future dividend payments — of five per cent (for listed firms) and 7.5pc (for unlisted firms).

Speaking to Dawn, Topline Securities CEO Mohammed Sohail said the proposed advance tax will be good for the stock market and the government, but hurt growth-oriented companies that need cash to fuel their expansion.

Board meetings will help the companies shield themselves from the likely advance tax through the declaration of one-time, heavy pay-outs to shareholders or an increase in authorised share capital to create space for the issuance of bonus shares. Bonus shares aren’t taxed, unlike cash dividends that attract a 15pc tax. “I believe the government will likely introduce a tax on bonus shares as well. That’s why these companies are in apparent haste to get the exercise done before the end of the fiscal year on June 30,” said Mr Sohail.

According to a research note by analyst Nasheed Malik of the same brokerage house, the reserves of PSX-listed companies stand at approximately Rs6.4 trillion.

There’s still no clarity on whether the government will impose the advance tax on total reserves, the increase in reserves during the last three years or the sum earned but not distributed in the current year alone.

At the rate of 5pc, the advance tax on reserves will generate Rs300bn-Rs350bn for the Federal Board of Revenue, the research note showed. The amount will be Rs140bn if the tax is imposed on the Rs2.8tr increase in reserves during the last three years.

Companies with the highest total reserves on their balance sheets are Oil and Gas Development Company Ltd (Rs965bn), Pakistan Petroleum Ltd (Rs487bn), Habib Bank Ltd (Rs262bn), National Bank of Pakistan Ltd (Rs256bn) and Pakistan State Oil Company Ltd (Rs217bn).

Published in Dawn, May 27TH, 2023