Supreme Court upholds 10% tax regime on corporate dividend income

July 20, 2026 (MLN): The Supreme Court of Pakistan has upheld the tax treatment of dividend income received by companies under Section 5 of the Income Tax Ordinance, 2001, ruling that such income is taxable at the prescribed dividend tax rate of 10% and cannot be subjected to the normal corporate tax rate of 35% under the head "Income from Other Sources."

In a nine-page judgment authored by Justice Aqeel Ahmed Abbasi and endorsed by Chief Justice Yahya Afridi, the apex court dismissed nine civil petitions filed by the Commissioner Inland Revenue (Zone-I), Large Taxpayer Office, Islamabad, against several corporate taxpayers, including Saudi Pak Industrial & Agricultural Investment Company, Fauji Foundation, Fauji Fertilizer Company Limited, CAPGAS Pvt Ltd, and State Engineering Corporation.

The petitions challenged a September 19, 2024 judgment of the Islamabad High Court, which had ruled in favour of taxpayers by holding that dividend income is assessable under Section 5 of the Income Tax Ordinance, 2001, rather than under Section 39, which deals with income from other sources.

The Federal Board of Revenue (FBR), through the Commissioner Inland Revenue, argued that although dividend income is subject to withholding tax, dividend received by a company does not constitute final tax liability because of the provisions of Section 8 and Section 169 of the Ordinance.

According to the department, such income should instead be assessed under Section 39 as "Income from Other Sources" and taxed at the normal corporate rate of 35%. It also relied on a proviso inserted through the Finance Act, 2007, which excluded dividend received by companies from the final tax regime under Section 8.

After examining Sections 5, 8 and 39 of the Income Tax Ordinance, 2001, the Supreme Court rejected the department's interpretation, observing that Section 5 is an independent charging provision specifically enacted for taxation of dividend income and carries its own tax rate and computation mechanism.

The court explained that while Section 4 of the Ordinance governs taxable income under the normal tax regime across various heads of income, Section 5 creates a separate charge exclusively for dividends received from companies.

It held that dividend income forms a distinct block of income and cannot simultaneously be taxed under the normal provisions applicable to other sources of income, as such an interpretation would effectively render Section 5 redundant.

The judgment emphasized that under established principles of statutory interpretation, every provision of law must be given effect and interpreted harmoniously.

Since Parliament created a dedicated charging section with a separate tax rate for dividends, tax authorities cannot disregard that framework and instead invoke the residual provisions of Section 39.

The bench further observed that Section 39 applies only where income does not fall under any other specific head of income. Since dividend income is expressly covered by Section 5, it cannot be reclassified as "Income from Other Sources" merely to attract a higher rate of taxation.

The Supreme Court also reiterated that charging provisions in tax statutes are substantive in nature and must be construed strictly, whereas machinery provisions dealing with assessment or collection cannot override substantive charging sections.

In this context, the court ruled that Section 8 merely prescribes the mechanism relating to final taxation and cannot alter or dilute the charging provision contained in Section 5.

Addressing the FBR's reliance on the proviso introduced through the Finance Act, 2007, the court held that even if the proviso excluded companies from the operation of Section 8 for a certain period, it did not alter the substantive legal position under Section 5, which independently governs taxation of dividend income.

The bench noted that machinery provisions cannot be used to deny taxpayers the benefit of a specific charging regime created by law.

The apex court also affirmed the Islamabad High Court's reliance on its earlier judgment in Fawad Ahmad Mukhtar v. Commissioner Inland Revenue (2022 SCMR 426), holding that the precedent squarely applied to the present controversy.

It observed that the earlier judgment had already clarified that dividend income constitutes a separate block of income taxable exclusively under Section 5, while Section 39 serves only as a residual provision that can be invoked where a specific charging provision is absent.

Finding no legal infirmity in the Islamabad High Court's judgment, the Supreme Court answered the questions of law in favour of the taxpayers and against the tax department.

Consequently, it held that dividend income received by companies remains taxable under Section 5 at the prescribed dividend tax rate, while the department's contention for applying the 35% normal corporate tax rate under Section 39 was rejected.

Accordingly, all nine civil petitions were dismissed and leave to appeal was refused.

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