The Supreme Court of Pakistan has ruled that dividend income received by companies is taxable under Section 5 of the Income Tax Ordinance, 2001, reaffirming that the prescribed 10% dividend tax rate applies and rejecting the Federal Board of Revenue's (FBR) attempt to tax such income at the standard corporate rate of 35%.

In a unanimous 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 against several corporate entities, including Saudi Pak Industrial & Agricultural Investment Company, Fauji Foundation, Fauji Fertilizer Company Limited, CAPGAS Pvt Ltd, and State Engineering Corporation.

The FBR had argued that dividend income received by companies should be assessed as "Income from Other Sources" under Section 39 of the Income Tax Ordinance and taxed at the normal corporate rate. However, the Supreme Court held that Section 5 is an independent charging provision specifically enacted for the taxation of dividend income and contains its own tax rate and assessment framework.

The court observed that dividend income constitutes a separate class of taxable income and cannot be reclassified under residual provisions merely to impose a higher tax burden. It further ruled that Section 39 applies only where no specific charging provision exists, while Section 8 relates only to the tax collection mechanism and cannot override the substantive provisions of Section 5.

Upholding the Islamabad High Court's earlier verdict, the Supreme Court concluded that dividend income received by companies remains taxable at the prescribed 10% rate under Section 5, rejecting the tax department's interpretation. The court dismissed all nine petitions, providing greater legal clarity and certainty on the taxation of corporate dividend income in Pakistan.