The purpose of this study is to explore the impact of taxes on dividend policy of banking sector in Pakistan. The data obtained from the financial reports of 21 banking companies listed on Karachi Stock Exchange over a period of five years (2006 to 2010) is used in this study. Pearson correlation and regression is used to find the relationship of tax and dividend income. The results show a significant correlation between taxation and dividend income of the banks and also suggest that the tax-rate is an important determinant of dividend policies of the banking sector.

Copyright © 2013 Akhlaq ul Hassan et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The problem: what is the taxation impact on dividend policy? While much optimal taxation research focuses on the e-conomic effects of taxation, the purpose of this study is to add a new dimension by investigating the relationship be-tween taxation and payout ratio and some other variables of dividend policy. These relations are tested using the data from financial statements of KSE listed companies. The results show that tax shield has no significant relation to the dividend payout ratio but mostly dividend policy is due to the size of the firm and its profitability.