ISLAMABAD: Pakistan’s Supreme Court has delivered a landmark judgment in a major tax dispute, rejecting the Federal Board of Revenue (FBR)‘s position that dividend income should be taxed at the standard 35% corporate tax rate.
The ruling upholds the earlier judgment of the Islamabad High Court, which had decided the matter in favor of taxpayers. The apex court dismissed all appeals filed by the FBR, declaring them to be without legal merit.
Dividend Income Subject Only to Section 5
In its judgment, the Supreme Court held that dividend income is governed exclusively by Section 5 of the Income Tax Ordinance, 2001, and not by Section 39.
The court ruled that the 10% withholding tax on dividend income constitutes the final tax liability, rejecting the FBR’s argument that dividend earnings should also be subject to the normal corporate income tax regime.
According to the judgment, dividend income falls within a separate taxation block and cannot be treated as ordinary business income for the purpose of imposing additional corporate tax.
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The court further observed that the specific tax mechanism established for dividend income must continue to apply and cannot be overridden by general taxation provisions.
FBR’s Appeals Dismissed
The decision was delivered by a two-member bench headed by Chief Justice Yahya Afridi, while the detailed judgment was authored by Justice Aqeel Ahmed Abbasi.
The dispute centered on the interpretation of Sections 5 and 39 of the Income Tax Ordinance, 2001.
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The FBR had argued that companies earning dividend income should also pay the normal 35% corporate income tax, whereas the petitioning companies maintained that the applicable 10% tax was final under the law.
The Supreme Court agreed with the taxpayers’ interpretation and declared the FBR’s legal position unsustainable.
Major Companies Involved in the Case
The petitions challenging the FBR’s interpretation were filed by several prominent corporate entities, including:
- Saudi Pak Industrial and Agricultural Investment Company
- Fauji Foundation
- Fauji Fertilizer Company
- CAP Gas
- Other corporate taxpayers
These companies had challenged the FBR’s tax demand after the Islamabad High Court ruled in their favor, a decision that the tax authority subsequently appealed before the Supreme Court.
Significance of the Judgment
Legal and tax experts view the ruling as an important clarification of Pakistan’s tax framework governing dividend income. The judgment reinforces the principle that dividend income remains subject to its dedicated tax regime and cannot be reclassified as ordinary taxable income for imposing additional corporate taxation.
The decision is expected to provide greater certainty for corporate taxpayers, investors, and financial institutions regarding the treatment of dividend income under Pakistan’s tax laws.
