KARACHI, June 18: Some ‘confusion’ over budgetary measure regarding tax on dividends had put an initial damper on investor interest in stocks, but KSE chairman Salim Chamdia told the finance minister that the issue had been resolved.

“Yes, he had asked me if there were any problems,” the KSE chairman told Dawn when probed. “I said there was some misunderstanding, which has been cleared,” he replied.

At a press briefing earlier in the day, the finance minister was told by a reporter that a part of the reason for Monday’s lacklustre performance of the stock market was ‘confusion’ over the tax on dividend income, to which the minister promised to have a word with the KSE officials.

It all began when a leading firm of chartered accountants, published its budget commentary in a newspaper on Monday, which mentioned that withholding tax deduction on dividend paid to individuals would not be ‘presumptive’. That was understood to mean that individual investor would henceforth pay the actual tax according to their respective income slabs at the time of assessment.

Mohammad Sohail, head of research at InvestCap, said he had been inundated with queries over the issue.

He stated that after seeking views from various tax consultants and going through the budget commentary of other audit firms, it transpired that tax on individuals would continue to be presumptive, i.e. it would be the full and final liability and could not be assessed. “Thus the new law (Income Tax Ordinance, 2001) has maintained the status quo as far as the treatment of withholding tax on dividend for individual investors is concerned,” Sohail said.

The Income Tax Ordinance 2001 is to replace the repealed Income Tax Ordinance 1979, from July 1, 2002.

According to the New Ordinance, dividends paid by resident companies to their shareholders (inclusive of companies) would be subject to a withholding tax. Under the old law there was no obligation on dividend paying company to withhold tax.

Now companies paying cash dividends to their corporate shareholders would deduct 5 per cent or 10 per cent withholding tax at source. “This will have a marginally negative impact on the liquidity of a few institutions,” analyst said.

As regards dividend income, it was noted that according to the Income Tax Ordinance 1979, rates of tax on dividend income varied between 5-20 per cent.

However, in the new Income Tax Ordinance, it has been decided to tax all dividend income at 10 per cent, other than that received by public or insurance company, which would be liable to a tax at 5 per cent. “And that settles the matter,” Sohail said, hoping that the investors would now get down to the business of trading.