The Ministry of Finance has sought clarification from the FBR to determine whether the jurisdiction for collecting and deducting these taxes lies with the FBR or the AJ&K Central Board of Revenue (CBR). FBR officials have indicated that since the tax incidence occurs within AJ&K, the taxes should be deposited with the AJ&K revenue authority. However, the matter is being referred to the FBR Member Policy for a comprehensive review and consideration of the legal issues involved.
The FBR is expected to issue a necessary clarification for both the Ministry of Finance and the AJ&K tax authorities. The Ministry of Defence has also informed the Ministry of Finance about the issue. The Commissioner of Inland Revenue (North Zone) Muzaffarabad has communicated to the Military Accountant General (MAG) that the FBR, as the federal tax collecting arm of the Government of Pakistan, collects income tax from the four provinces of Pakistan but does not have jurisdiction in AJ&K.
The AJ&K CBR, established under the AJ&K CBR Act 2020, is legally authorized to collect taxes within AJ&K through its Inland Revenue Department.
The Commissioner further requested that income tax and sales tax be collected or deducted at prescribed rates for payments related to AJ&K and deposited into the AJ&K CBR account instead of the FBR. Consequently, the MAG’s Office has requested the Ministry of Defence to approach the FBR for necessary clarification.
AJ&K tax authorities have emphasized that AJ&K is a distinct tax entity from mainland Pakistan due to its unique status. The FBR collects income tax from the four provinces of Pakistan, excluding AJ&K, where it lacks jurisdiction. The AJ&K Council Board of Revenue is legally empowered to collect taxes from this territory.
Organizations and businesses operating in both tax jurisdictions—FBR (covering the four provinces of Pakistan) and AJ&K CBR (covering AJ&K)—are taxed in both places based on the income earned in each jurisdiction. Banks, cellular companies, and foreign companies executing contracts on major projects like the Neelum-Jhelum Hydro Power Project and the Mangla Dam upraising project, as well as federal government institutions operating in both AJ&K and Pakistan, deposit withholding taxes with the AJ&K CBR for payments destined for AJ&K. They also file separate withholding statements with both the AJ&K CBR Inland Revenue Department and the FBR for their respective business shares.
Similarly, organizations operating in both jurisdictions deduct and collect taxes in their respective areas and deposit them into the AJ&K Government account for AJ&K territory and the FBR account for mainland Pakistan. These entities file statements in both jurisdictions based on the share of tax collected in each location, according to AJ&K tax authorities.
