taxation of dividend received by the company

ejaz bhutta · 03-12-2009, 09:22 PM

Section 4, 5, 8, 94 of Income Tax Ordinance, 2001 (ITO) relate to dividend.

Section 4 sub section 4 states that

âCertain classes of income (including the income of certain classes of persons) may be subject to separate taxation as provided in sections 5, 6 and 7;â

Section 94 sub section 2 states that

âA dividend paid by a resident company shall be taxable in accordance with Section 5â

Section 5 states that

Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division III of Part I of the First Schedule, on every person who receives a dividend from a company.

Section 8 states that

âThe tax imposed under section 5 shall be a final taxâ however it also states that âthe provisions of this section shall not apply to dividend received by a companyâ.

From all these section it is clear that dividend will be subject to tax separately and applicable tax rate would be @ 10% and this tax will not be final tax. So, it will be treated under normal tax regime and business losses can be set off against this dividend as section 56 sub section 1 states that

âwhere a person sustains a loss for any tax year under any head of income specified in section 11, the person shall be entitled to have the amount of the loss set off against the personâs income, if any, chargeable to tax under any other head of income for the year.â
Please guide me whether my understanding related to dividend taxation is in accordance with Income Tax Ordinance, 2001.

m_zeeshanuddin_sa · 03-27-2009, 02:33 PM

I think you are rite, just like tax withheld on interest accrued is not final tax on comapany, Tax on dividend is not also final tax & hence can also be adjsuted against loss C/f.

Star · 07-18-2011, 05:46 PM

Dear All,

It is good topic to comment. Tax experts/students are encouraged to share any available case laws on this topic.

Please comment if the company's principal activity is to make investments then how the dividends received by that company will be taxed? I mean 10% or 35%.....?

*

student_of_law · 07-20-2011, 04:34 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Star
 Dear All,

It is good topic to comment. Tax experts/students are encouraged to share any available case laws on this topic.

Please comment if the company's principal activity is to make investments then how the dividends received by that company will be taxed? I mean 10% or 35%.....?

*
<hr height="1" noshade id="quote"></blockquote id="quote">

I think even if the principal activity of the company is making investment, the dividend will continue to be charged to tax according to s.5 i.e @10%.

One of the reasons therefor is the presence of s.94(2) and s.5 in the Ordinance. s.94(2) clearly lays down the principle that dividend shall be taxable in accordance with s.5. while s.5 through schedule prescribes rate of 10%.

Further, the overwhelming section is s.4. Sub section 1 of s.4 gives genearal rule that taxable income shall be charged according to rates given in Part I of first Schedule [this schedule gives rate of 35% for company]
While sub section (4) and (5) of s.4 gives exception. It says that certain classes of income, that includes dividend income u/s 5 , will be subject to separate taxation. That means that it cannot be included in any other head. This position is clarified by sub section (5) that clearly says that dividend income will be taxed according to s.5 and shall not be included in calculating taxable income.

So in nutshell according to s.4,
General Rule taxable income is charged according to part I of first schedule[s.4(1)]
Dividend income is to be taxed separately according to s.5 [s.4(4)] section 5 gives rate of 10% for taxing dividend

Dividend income shall not be included in the computation of taxable income [s.4(5)]

Though s.8 has been made inapplicable to the company. However, its clause (a) that says that dividend income will not be charged to tax under any other head will still remain applicable. Why? Because s.5(5) says that dividend income shall not be included in the computation of taxable income in accordance with s.8. So the portion of s.8 relating to calculation of taxable income by excluding dividend income shall be applicable to company by virtue of s.5(5) Section5 is undoubtedly in force and applicable to the company.

Recently taxation of dividend income is discussed in the case of Fauji Fertilizers case by the Tribunal. [2011 P T D (Trib.) 352]
Though this is not a case of company whose principle activity is making investment. HOwever, it may help a lot in understanding the concept of taxing dividend under ITO, 2001

Now in the light of above there appears to be one issue with the interpretation of Mr. Ejaz Bhutta. If amount received u/s 5 is not to be added to any other head for calculating taxable income and it is to be taxed separately, then can we add this amount to business loss for reducing it. It seems to me against the principle of consistency.

If u/s 4(4) & 4(5), dividend income is to be taxed separately and it cannot increase a person's taxable income then according to principle of consistency , it should also not be reduced against loss under any other head.

Loss is nothing but a negative income. And Setting off of loss is nothing but just clubbing positive income and negative income (loss) together to reduce the quantum of positive income.

For example
A sustains loss from business. (Rs.10) we can write it Rs.-10
A earns salary income 100

Now the taxable income would be 100 + (-10) = 90.. Loss under one head has reduced profit under the other.

Had there been profit under both heads they would be added together. For example instead of sustaining loss of Rs.10 Mr. A has earned profit of Rs.10. Then his taxable income would have been Rs.100 + 10 = 110

However, dividend income is taxed separately. As earlier said, principle of consistency demands, that if dividend income does not adds to income under any other head to determine taxable income then it should also not be reduced by loss under any other head.

s.56 says that loss under one head is set off against the income under other head. While dividend income under s.5 is taxed as separate class of income and it does not form part of any of the heads mentioned under s.11, hence it cannot set off loss u/s 56.

Further, it is 11(4) that says that loss is to be dealt with according to part VIII of this Chapter(this ch. inlcudes s.56 that deals with setting off of loss). s.11 is present in the Chapter titled , "Computation of Taxable Income". Why legislature find it appropriate to make reference to Part VIII in s.11(4)? BECAUSE setting off of loss against income relates essentially to "computation of taxable income",

Now if we revert of s.4(5) it clearly says that income u/s 5 i.e. dividend income shall not be included in computation of taxable income. Hence any rule regarding computation of taxable income, whether in s.11(4) or in s.56 shall not affect the taxation of dividend u/s5

Star · 07-21-2011, 09:48 PM

Thanks for giving a details and useful reply...

*

Sayub · 08-13-2011, 03:40 AM

Dear student of law your comment is really commendable.#8626;#8626;but i find it hard to understand what sec 4(5) says. 'income under sec 5 shall not be included in the computation of taxable income in accordance with sec 8 or 169 as the case may be.' if sec 8 is for computation of taxable income under sec 5 then why the words 'shall not' are used in sec 4(5)? <blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by student_of_law
 <blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Star
 Dear All,

It is good topic to comment. Tax experts/students are encouraged to share any available case laws on this topic.

Please comment if the company's principal activity is to make investments then how the dividends received by that company will be taxed? I mean 10% or 35%.....?

*
<hr height="1" noshade id="quote"></blockquote id="quote">

I think even if the principal activity of the company is making investment, the dividend will continue to be charged to tax according to s.5 i.e @10%.

One of the reasons therefor is the presence of s.94(2) and s.5 in the Ordinance. s.94(2) clearly lays down the principle that dividend shall be taxable in accordance with s.5. while s.5 through schedule prescribes rate of 10%.

Further, the overwhelming section is s.4. Sub section 1 of s.4 gives genearal rule that taxable income shall be charged according to rates given in Part I of first Schedule [this schedule gives rate of 35% for company]
While sub section (4) and (5) of s.4 gives exception. It says that certain classes of income, that includes dividend income u/s 5 , will be subject to separate taxation. That means that it cannot be included in any other head. This position is clarified by sub section (5) that clearly says that dividend income will be taxed according to s.5 and shall not be included in calculating taxable income.

So in nutshell according to s.4,
General Rule taxable income is charged according to part I of first schedule[s.4(1)]
Dividend income is to be taxed separately according to s.5 [s.4(4)] section 5 gives rate of 10% for taxing dividend

Dividend income shall not be included in the computation of taxable income [s.4(5)]

Though s.8 has been made inapplicable to the company. However, its clause (a) that says that dividend income will not be charged to tax under any other head will still remain applicable. Why? Because s.5(5) says that dividend income shall not be included in the computation of taxable income in accordance with s.8. So the portion of s.8 relating to calculation of taxable income by excluding dividend income shall be applicable to company by virtue of s.5(5) Section5 is undoubtedly in force and applicable to the company.

Recently taxation of dividend income is discussed in the case of Fauji Fertilizers case by the Tribunal. [2011 P T D (Trib.) 352]
Though this is not a case of company whose principle activity is making investment. HOwever, it may help a lot in understanding the concept of taxing dividend under ITO, 2001

Now in the light of above there appears to be one issue with the interpretation of Mr. Ejaz Bhutta. If amount received u/s 5 is not to be added to any other head for calculating taxable income and it is to be taxed separately, then can we add this amount to business loss for reducing it. It seems to me against the principle of consistency.

If u/s 4(4) & 4(5), dividend income is to be taxed separately and it cannot increase a person's taxable income then according to principle of consistency , it should also not be reduced against loss under any other head.

Loss is nothing but a negative income. And Setting off of loss is nothing but just clubbing positive income and negative income (loss) together to reduce the quantum of positive income.

For example
A sustains loss from business. (Rs.10) we can write it Rs.-10
A earns salary income 100

Now the taxable income would be 100 + (-10) = 90.. Loss under one head has reduced profit under the other.

Had there been profit under both heads they would be added together. For example instead of sustaining loss of Rs.10 Mr. A has earned profit of Rs.10. Then his taxable income would have been Rs.100 + 10 = 110

However, dividend income is taxed separately. As earlier said, principle of consistency demands, that if dividend income does not adds to income under any other head to determine taxable income then it should also not be reduced by loss under any other head.

s.56 says that loss under one head is set off against the income under other head. While dividend income under s.5 is taxed as separate class of income and it does not form part of any of the heads mentioned under s.11, hence it cannot set off loss u/s 56.

Further, it is 11(4) that says that loss is to be dealt with according to part VIII of this Chapter(this ch. inlcudes s.56 that deals with setting off of loss). s.11 is present in the Chapter titled , "Computation of Taxable Income". Why legislature find it appropriate to make reference to Part VIII in s.11(4)? BECAUSE setting off of loss against income relates essentially to "computation of taxable income",

Now if we revert of s.4(5) it clearly says that income u/s 5 i.e. dividend income shall not be included in computation of taxable income. Hence any rule regarding computation of taxable income, whether in s.11(4) or in s.56 shall not affect the taxation of dividend u/s5
<hr height="1" noshade id="quote"></blockquote id="quote">

Sayub · 08-13-2011, 03:43 AM

Dear student of law your comment is really commendable.#8626;#8626;but i find it hard to understand what sec 4(5) says. 'income under sec 5 shall not be included in the computation of taxable income in accordance with sec 8 or 169 as the case may be.' if sec 8 is for computation of taxable income under sec 5 then why the words 'shall not' are used in sec 4(5)? <blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by student_of_law
 <blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Star
 Dear All,

It is good topic to comment. Tax experts/students are encouraged to share any available case laws on this topic.

Please comment if the company's principal activity is to make investments then how the dividends received by that company will be taxed? I mean 10% or 35%.....?

*
<hr height="1" noshade id="quote"></blockquote id="quote">

I think even if the principal activity of the company is making investment, the dividend will continue to be charged to tax according to s.5 i.e @10%.

One of the reasons therefor is the presence of s.94(2) and s.5 in the Ordinance. s.94(2) clearly lays down the principle that dividend shall be taxable in accordance with s.5. while s.5 through schedule prescribes rate of 10%.

Further, the overwhelming section is s.4. Sub section 1 of s.4 gives genearal rule that taxable income shall be charged according to rates given in Part I of first Schedule [this schedule gives rate of 35% for company]
While sub section (4) and (5) of s.4 gives exception. It says that certain classes of income, that includes dividend income u/s 5 , will be subject to separate taxation. That means that it cannot be included in any other head. This position is clarified by sub section (5) that clearly says that dividend income will be taxed according to s.5 and shall not be included in calculating taxable income.

So in nutshell according to s.4,
General Rule taxable income is charged according to part I of first schedule[s.4(1)]
Dividend income is to be taxed separately according to s.5 [s.4(4)] section 5 gives rate of 10% for taxing dividend

Dividend income shall not be included in the computation of taxable income [s.4(5)]

Though s.8 has been made inapplicable to the company. However, its clause (a) that says that dividend income will not be charged to tax under any other head will still remain applicable. Why? Because s.5(5) says that dividend income shall not be included in the computation of taxable income in accordance with s.8. So the portion of s.8 relating to calculation of taxable income by excluding dividend income shall be applicable to company by virtue of s.5(5) Section5 is undoubtedly in force and applicable to the company.

Recently taxation of dividend income is discussed in the case of Fauji Fertilizers case by the Tribunal. [2011 P T D (Trib.) 352]
Though this is not a case of company whose principle activity is making investment. HOwever, it may help a lot in understanding the concept of taxing dividend under ITO, 2001

Now in the light of above there appears to be one issue with the interpretation of Mr. Ejaz Bhutta. If amount received u/s 5 is not to be added to any other head for calculating taxable income and it is to be taxed separately, then can we add this amount to business loss for reducing it. It seems to me against the principle of consistency.

If u/s 4(4) & 4(5), dividend income is to be taxed separately and it cannot increase a person's taxable income then according to principle of consistency , it should also not be reduced against loss under any other head.

Loss is nothing but a negative income. And Setting off of loss is nothing but just clubbing positive income and negative income (loss) together to reduce the quantum of positive income.

For example
A sustains loss from business. (Rs.10) we can write it Rs.-10
A earns salary income 100

Now the taxable income would be 100 + (-10) = 90.. Loss under one head has reduced profit under the other.

Had there been profit under both heads they would be added together. For example instead of sustaining loss of Rs.10 Mr. A has earned profit of Rs.10. Then his taxable income would have been Rs.100 + 10 = 110

However, dividend income is taxed separately. As earlier said, principle of consistency demands, that if dividend income does not adds to income under any other head to determine taxable income then it should also not be reduced by loss under any other head.

s.56 says that loss under one head is set off against the income under other head. While dividend income under s.5 is taxed as separate class of income and it does not form part of any of the heads mentioned under s.11, hence it cannot set off loss u/s 56.

Further, it is 11(4) that says that loss is to be dealt with according to part VIII of this Chapter(this ch. inlcudes s.56 that deals with setting off of loss). s.11 is present in the Chapter titled , "Computation of Taxable Income". Why legislature find it appropriate to make reference to Part VIII in s.11(4)? BECAUSE setting off of loss against income relates essentially to "computation of taxable income",

Now if we revert of s.4(5) it clearly says that income u/s 5 i.e. dividend income shall not be included in computation of taxable income. Hence any rule regarding computation of taxable income, whether in s.11(4) or in s.56 shall not affect the taxation of dividend u/s5
<hr height="1" noshade id="quote"></blockquote id="quote">

student_of_law · 08-13-2011, 04:37 PM

[quote]Originally posted by Sayub
 i find it hard to understand what sec 4(5) says. 'income under sec 5 shall not be included in the computation of taxable income in accordance with sec 8 or 169 as the case may be.' if sec 8 is for computation of taxable income under sec 5 then why the words 'shall not' are used in sec 4(5)? [quote]

Rephrase s.4(5), as follows

In accordance with s.8 & 169, income u/s sec 5 shall not be included in the computation of taxable income

Further rephrase it as

According to s.8 & 169, income u/s sec 5 shall not be included in the computation of taxable income

I think you would have understood it now.

Sayub · 08-13-2011, 09:54 PM

Thanks so much student of law. <blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by student_of_law
 [quote]Originally posted by Sayub
 i find it hard to understand what sec 4(5) says. 'income under sec 5 shall not be included in the computation of taxable income in accordance with sec 8 or 169 as the case may be.' if sec 8 is for computation of taxable income under sec 5 then why the words 'shall not' are used in sec 4(5)? [quote]

Rephrase s.4(5), as follows

In accordance with s.8 & 169, income u/s sec 5 shall not be included in the computation of taxable income

Further rephrase it as

According to s.8 & 169, income u/s sec 5 shall not be included in the computation of taxable income

I think you would have understood it now.
<hr height="1" noshade id="quote"></blockquote id="quote">