Supreme Court Rejects FBR Dividend Tax Petitions

The Supreme Court has ruled that dividend income earned by companies must be taxed exclusively under Section 5 of the Income Tax Ordinance, 2001, and cannot be subjected to the standard 35% corporate income tax rate.

According to media reports, a two-member bench comprising Chief Justice Yahya Afridi and Justice Aqeel Ahmed Abbasi dismissed nine civil petitions filed by the Commissioner Inland Revenue of the Large Taxpayers Office, Islamabad, while affirming the Islamabad High Court’s ruling issued on September 19, 2024.

Justice Aqeel Ahmed Abbasi authored the verdict, which had been reserved following hearings concluded on July 3, 2026.

The Supreme Court observed that Section 5 is a special and independent provision specifically designed to regulate the taxation of dividend income through its own tax rate and collection framework.

It further ruled that dividend earnings cannot be classified as income from other sources under Section 39 to justify the application of the 35% normal corporate tax rate.

The judgment stated that interpreting dividend income under Section 39 would effectively make Section 5 meaningless, violating the established legal principle that every statutory provision must be given practical effect.

The bench emphasized that Section 5 functions as a distinct charging provision under the Income Tax Ordinance, creating a separate taxation mechanism for dividend income outside the ordinary corporate tax system.

Citing its earlier decision in Fawad Ahmed Mukhtar versus Commissioner Inland Revenue (2022 SCMR 426), the Supreme Court reaffirmed that dividend income forms a separate category of income and is taxable only under Section 5.

The court also dismissed the Federal Board of Revenue’s argument that an amendment introduced to Section 8 through the Finance Act, 2007, removed dividends received by companies from the final tax regime.

It held that Section 8 is merely procedural and cannot override, modify, or limit the substantive legal effect of Section 5.

Finding no legal flaw in the Islamabad High Court’s decision, the Supreme Court upheld the judgment and dismissed all petitions filed by the FBR.