PTBP Web Desk
The Federal Board of Revenue (FBR) and the tax authorities of Azad Jammu and Kashmir (AJ&K) regarding the deduction and withholding of income tax and sales tax on contracts, services, and goods executed in AJ&K. The debate centers around the legal jurisdiction of tax collection, with both federal and AJ&K authorities presenting conflicting viewpoints.
The Ministry of Finance has formally sought clarification from the FBR on whether the responsibility for the collection of taxes on goods, services, and contracts in AJ&K falls under the jurisdiction of the FBR or the AJ&K Central Board of Revenue (CBR). This clarification is vital to resolving the ongoing disagreement over the legal obligations of withholding agents who are making payments for contracts executed and supplies made in the region of AJ&K.
Officials from the FBR have stated that since the incidence of tax arises within the territory of AJ&K, the tax payments should be deposited with the AJ&K revenue authority. This view is rooted in the understanding that AJ&K has a distinct legal and tax jurisdiction, separate from mainland Pakistan. However, the FBR has referred the matter to its Member Policy for a thorough review, ensuring all legal implications are carefully considered before issuing a final statement. The need for clarity on this issue is becoming more urgent as the confusion impacts both federal and provincial tax authorities.
In addition, the Ministry of Defence has also informed the Ministry of Finance about this issue. According to their communications, there is a clear demarcation of tax jurisdictions, with AJ&K falling outside the tax-collecting purview of the FBR. A letter sent by the Commissioner Inland Revenue (North Zone) Muzaffarabad to the Military Accountant General (MAG) further highlighted this distinction. The letter stated that the FBR, which operates as the federal tax collection authority for the four provinces of Pakistan, holds no jurisdiction over the collection of taxes within AJ&K.
The Central Board of Revenue of AJ&K, which was established under the AJ&K CBR Act of 2020, is legally empowered to collect taxes, including income tax and sales tax, within the region of AJ&K. Tax authorities in AJ&K have emphasized that AJ&K has always operated as a distinct tax entity due to its unique status. As a result, any organization or business operating within both jurisdictions—AJ&K and mainland Pakistan—must comply with the respective tax laws of both territories.
The AJ&K tax authorities have pointed out that numerous businesses, including banks, telecom companies, and foreign entities working on major projects such as the Neelum-Jhelum Hydropower Project, Mangla Dam upraising project, and Karot Hydropower Project, already follow this dual taxation system. These organizations deposit withholding taxes with the AJ&K CBR for payments related to AJ&K operations, while filing separate tax returns in both AJ&K and the FBR, depending on the location of their business activities.
For instance, large-scale organizations working simultaneously across both jurisdictions are required to deduct and collect taxes according to their respective territorial boundaries. Payments for services and contracts executed in AJ&K are deposited with the AJ&K CBR, whereas taxes collected in the four provinces of Pakistan are submitted to the FBR. This dual reporting and taxation system is well-established and allows both territories to receive their respective share of the taxes.
The growing concern among tax authorities and businesses is the lack of clarity on tax jurisdiction and the administrative burden of managing tax obligations across two separate entities. AJ&K officials have stressed the importance of maintaining clear guidelines to avoid double taxation and confusion among businesses. They have argued that since AJ&K is a distinct tax jurisdiction, all taxes on contracts, services, and goods in the region should be deposited with AJ&K’s tax authorities rather than the FBR.
In response to the concerns raised by AJ&K authorities, the Ministry of Defence has requested the Ministry of Finance to approach the FBR for a necessary clarification. This request emphasizes the urgency of settling the matter to avoid further confusion and ensure that the tax withholding process is transparent and consistent for both local and international businesses operating in Pakistan and AJ&K.
