Karachi, May 29, 2023 (PPI-OT): Reserve tax bringing bonus issues to the fore

News reports doing the rounds indicate GoP plan to tax distributable reserves of corporates for increasing tax collection. For next year, a tax collection target of PkR9.2tn is being reportedly mooted for.

In this regard, a tax of 5% on accumulated profits of listed companies and 7.5% on accumulated profits of unlisted companies has been proposed, with the tax adjustable on future payouts.

Three options with corporates to counter the said measure in our view include i) big dividend payouts (where cash is available), ii) issuance of bonus shares and iii) buy-back programs.

Already at the PSX, a number of corporates have announced EOGMs for increasing authorized capital with a view to issuing bonus shares.

In FY15, a similar tax was imposed slating 10% tax on distributable reserves where payout was less than 40% which was subsequently changed in FY17 to 5% of accounting profit should payout be lower than 20%.

While the proposed tax measure will impact all and sundry, major corporates likely to come in the limelight include MARI, INDU, GADT, LUCK (buyback already in pipeline), APL, MUREB, NML, KOHC, HBL, ENGRO etc. (For an exhaustive list, please see below).

From the PSX’ vantage, bonus issues can potentially spur investor interest in the near term.