Does tax on undistributed profits under section 5A still apply to companies that do not pay dividends?

Section 5A of the Income Tax Ordinance, 2001 is still printed in the consolidated text, but its charge is tied to three past tax years. In the edition amended to 30 June 2026 it imposes no tax for tax year 2020 or any later year, including tax year 2027.

What does the law say?

Section 5A(1) reads, in its current form, that “For tax years 2017 to 2019” a tax is imposed at five percent “of its accounting profit before tax on every public company, other than a scheduled bank or a modaraba, that derives profit for a tax year but does not distribute at least” twenty percent of its after tax profits within six months of the end of the tax year through cash.

The elements are:

Element	What the section says
Tax years	2017 to 2019 only
Who	A public company, other than a scheduled bank or a modaraba
Trigger	Profit for the year, and less than 20% of after-tax profit distributed in cash within six months of the year end
Base	Accounting profit before tax
Rate	5%

A proviso allowed, for tax year 2017, bonus shares or cash dividends to be distributed before the due date for filing the return.

Section 5A(2) excludes two further groups:

• a company qualifying for exemption under clause (132) of Part I of the Second Schedule; and
• a company in which not less than fifty percent of the shares are held by the Government.

Section 8 lists section 5A among the taxes that are “a final tax on the amount in respect of which the tax is imposed”.

Why does it not apply now?

The limit is in the opening words. A footnote records that the expression “year 2017 and onwards” was replaced by “years 2017 to 2019” through the Finance Supplementary (Second Amendment) Act, 2019. Nothing in the consolidated text as amended to 30 June 2026 extends it to a later year, and no rate for it appears in the First Schedule, because the rate is written into the section itself.

Which companies were “public companies”?

Section 2(47) defines “public company” to include a company in which not less than fifty per cent of the shares are held by the Federal or a Provincial Government, a company majority held by a foreign Government, and “a company whose shares were traded on a registered stock exchange in Pakistan at any time in the tax year and which remained listed on that exchange” at the end of that year. Government-held companies meet the definition but are then taken out by section 5A(2)(b), which leaves listed companies as the main group that was exposed. Private companies were never within section 5A.

How did the section change over time?

The footnotes to section 5A record these amendments:

• The Finance Act, 2017 substituted the whole section. The earlier version, headed “Tax on undistributed reserves”, charged ten percent on reserves above one hundred percent of paid up capital where a public company did not distribute cash dividends within six months.
• The Finance Act, 2018 substituted “five” for “seven and half” as the rate, substituted “twenty” for “forty” as the distribution threshold, and omitted the words “or bonus shares”.
• The Finance Supplementary (Second Amendment) Act, 2019 limited the section to tax years 2017 to 2019.

The consolidated text does not say whether the 2018 changes to the rate and threshold reach back to tax year 2017. For that year, the Finance Acts of 2017 and 2018 would need to be read together.

Worked example (illustrative figures)

A listed textile company in Faisalabad, tax year 2019:

1. Accounting profit before tax: Rs. 100,000,000. After-tax profit: Rs. 70,000,000.
2. Minimum cash distribution to avoid the charge: Rs. 70,000,000 x 20% = Rs. 14,000,000, paid within six months of the year end.
3. The company paid a cash dividend of Rs. 10,000,000 only, which is below Rs. 14,000,000.
4. Section 5A tax: Rs. 100,000,000 x 5% = Rs. 5,000,000.

The same company with the same figures in tax year 2027 would owe nothing under section 5A, because the section no longer charges that year.

What if a company is asked about section 5A for an old year?

The section still governs tax years 2017, 2018 and 2019, so a question about one of those years is answered by the section as printed, subject to the timing point above. How long an old assessment can be reopened is dealt with elsewhere in the Ordinance and is not covered on this page.

Common mistakes

• Treating section 5A as a current charge. Since the 2019 amendment it covers tax years 2017 to 2019 only.
• Applying it to a private company. It only ever applied to public companies.
• Using after-tax profit as the base. The 20% test uses after-tax profit, but the 5% tax is calculated on accounting profit before tax.
• Counting bonus shares as a distribution. The main rule requires a cash distribution. Only the tax year 2017 proviso mentions bonus shares.

What to check in the official text

Read section 5A with its footnotes, section 8 and clause (47) of section 2 in the official PDF of the Ordinance. For tax year 2017, read the Finance Act, 2017 and the Finance Act, 2018 in this corpus to see which rate and threshold applied. Check clause (132) of Part I of the Second Schedule if a company claims the section 5A(2)(a) exclusion.