The tax collection from dividend income has registered a sharp growth of 33 percent during the fiscal year 2020-21 due to better earnings of the corporate sector. The collection of income tax grew to Rs18.46 billion during the fiscal year 2020-21, compared with Rs13.83 billion in the preceding fiscal year. The tax collection from the dividend income is based on the earnings of the companies registered with the Large Taxpayers Office (LTO) Karachi. The LTO Karachi is the major revenue arm of the Federal Board of Revenue (FBR) and contributes around 40 percent of the land taxes in the total collection at the national level. The rise in the tax collection is attributed to improved profitability of the corporate sector and hike in the tax rate announced in the last budget 2020-21. The tax rate was increased to 25 percent in the case of a person receiving dividend from a company where no tax is payable by such company due to the exemption of income or carry forward of business losses or claim of tax credits. However, the withholding tax was prescribed at 15 percent in such cases. Through the Finance Act 2020, the withholding tax rate had also been enhanced to 25 percent in such cases to address this inconsistency. According to financial gurus, the government may collect more than double the non-tax revenue in the shape of dividends from state-owned enterprises (SOEs). The government may receive an additional Rs34 billion to Rs64 billion in dividend from the SOEs in the current fiscal year if it introduces a policy requiring the state units to pay 50 percent of the net income in dividend to their shareholders. Many SOEs listed on the Pakistan Stock Exchange (PSX) earn hefty profits, but disburse low dividends to the shareholders, including the government. They avoid paying a reasonable dividend to keep cash in hand to cope with any financial trouble in future. “As we are already aware, SOEs at present are paying a relatively low cash dividend to the shareholders,” Arif Habib Limited (AHL) Head of Research Tahir Abbas said. A predominant reason for the low dividend payout by the SOEs is the massive circular debt that has led to liquidity constraints in the energy chain. “Earning heavy profits will be a major stimulant for the government’s non-tax revenues,” he added. A healthy dividend yield will be beneficial for investor confidence in the stock market and subsequently for the development of capital markets. “Higher dividends will benefit the government in terms of revenue in lieu of withholding tax that is paid on shares not owned by the government of Pakistan,” he said. “As per our calculations, if we assume a modest 50% profit-after-tax payout ratio for all these entities, the non-tax revenue from the dividend income can amount to Rs65 billion for FY22, which is Rs34 billion higher than what is expected in FY21,” Abbas said. “Furthermore, through this increased dividend payout, the government can earn an additional Rs2.3 billion in revenue in lieu of withholding taxes.” “This (increase in dividend yield) will not only help in achieving fair values of these stocks, but will also boost investor sentiment, resulting in higher capital gains tax for the government,” Abbas said. The SOEs included Oil and Gas Development Company Limited (OGDCL), Pakistan Petroleum Limited (PPL) and Pakistan State Oil (PSO).