A Practical Guide for FBR-Registered Businesses Making Payments to AJK-Registered Persons
Businesses operating in Pakistan often engage suppliers, service providers, or contractors based in Azad Jammu & Kashmir (AJK). While AJK commonly applies a tax framework parallel to Pakistan’s Income Tax Ordinance, 2001 (ITO 2001), its tax administration is completely separate under the AJK Council Board of Revenue (AJK CBR).
This jurisdictional separation creates uncertainty for businesses registered with the Federal Board of Revenue (FBR), particularly concerning withholding tax obligations on payments made to AJK-based vendors.
This article provides a complete, structured analysis of the withholding tax implications, including the treatment under ITO 2001, residency considerations, inter-jurisdiction issues, and defensible compliance options.
Constitutional and Legal Position
Territorial Scope of the Income Tax Ordinance, 2001
Section 1 of the Income Tax Ordinance, 2001 states that it “extends to the whole of Pakistan.”
However, the Constitution distinguishes:
Pakistan proper (Federation + Provinces)
AJK and Gilgit-Baltistan (GB), which are self-governing territories administered separately and not constitutionally included in “Pakistan” unless expressly stated
Therefore, when ITO 2001 says “whole of Pakistan,” this does not automatically include AJK or GB unless:
The law is extended through a constitutional order, OR
The respective territory adopts the law independently.
AJK has adopted the Income Tax Ordinance, 2001 with amendments, but administers it independently via AJK CBR.
Are AJK Persons “Non-Residents” Under FBR’s Income Tax Law?
Residency Test Under Section 82 (Individuals)
An individual is resident in Pakistan if:
Present in Pakistan for 183 days or more in a tax year;
Present in Pakistan for 120 days in the current year + 365 days preceding 4 years;
Is a Government of Pakistan employee posted abroad.
Key Issue:
Does physical stay in AJK count as “stay in Pakistan” for purposes of FBR’s residency test?
Interpretation:
Since AJK is not constitutionally part of Pakistan, and since ITO 2001 is applied there by AJK CBR, physical presence in AJK does not amount to presence in Pakistan for FBR residency purposes.
Therefore, an AJK-based individual vendor is treated as:
Resident in AJK for AJK tax laws
Non-resident under FBR-administered ITO 2001 (if physical stay in Pakistan is less than 183 days)
However, being a non-resident under FBR is not equivalent to being a foreign person, because AJK is not a foreign country nor covered under any tax treaty.
This leads to a unique classification mismatch, discussed next.
Does Section 153 (Residents) Apply?
Section 153 applies to payments to resident persons under FBR jurisdiction.
An AJK person:
Is not registered with FBR
Does not file tax returns with FBR
Is outside FBR’s administrative jurisdiction
Therefore, Section 153 does NOT apply.
Does Section 152 (Payments to Non-Residents) Apply?
At first glance, one might conclude that AJK residents should be treated as non-residents under Section 152 (payments to non-residents). But there is a fundamental legal obstacle:
Section 152 applies only when:
The recipient is a non-resident person, AND
The nature of payment is Pakistan-source, AND
The non-resident is taxable under ITO 2001 by FBR.
AJK residents do not fall under FBR tax jurisdiction, nor under any tax treaty, nor under withholding categories defined for foreign jurisdictions.
Therefore:
- Section 152 cannot be applied, because AJK persons are administratively non-taxable under FBR.
- FBR has no machinery to receive such tax, no crediting process for AJK, and no obligation is created under the scheme of the law.
Why No FBR Withholding Applies (Summary)
Recipient is not resident in Pakistan → Section 153 does not apply.
Recipient does not fall under the criteria of a non-resident person → Section 152 cannot apply.
Payment is not cross-border → Not covered under import, royalty, services, or contract payments to foreign entities.
FBR has no mechanism to collect, link, or credit taxes relating to AJK CBR.
No legal provision treats AJK residents as taxable persons under FBR law.
Conclusion: No FBR withholding tax applies on payments to AJK vendors.
Does AJK Withholding Apply?
AJK CBR administers its own version of ITO 2001.
Under AJK rules:
Payments made within AJK are subject to AJK withholding tax.
If a payer outside AJK makes a payment to an AJK-registered person, AJK may treat it as taxable within AJK.
However:
A business in Pakistan cannot deposit AJK withholding tax unless registered with the AJK CBR.
AJK CBR currently has no system for non-residents (from Pakistan) to deposit tax without registration.
Therefore, the payer has two practical options.
The Two Practical Compliance Options
Option 1 — Register with AJK CBR and deduct AJK withholding
Suitable for recurring or large payments
Legally safest
Allows the payer to deduct tax under AJK law and deposit it properly
Creates compliance in both jurisdictions
Option 2 — Make Gross Payment + Vendor Undertaking
If registration in AJK CBR is not feasible:
Make a gross payment
Obtain a written undertaking confirming:
Vendor is not subject to FBR tax jurisdiction
Vendor is registered in AJK only
Vendor will declare and pay all applicable AJK taxes
Payer is not liable under FBR for withholding
This protects the payer from future audits by FBR.
This is the most commonly followed and practical approach for occasional payments.
If Business is Registered with Both FBR and AJK CBR
Where the person to whom payment is being made is registered with AJK CBR as well as FBR, then tax withholding shall be applied at the rates applicable within Pakistan, and the recipient shall disclose the receipt in its income tax return submitted with FBR.
Where the person making payment is registered with FBR as well as AJK CBR, then no issue of jurisdiction shall arise, as the territory of AJK CBR applies to both.
Conclusion
Payments from a Pakistan-registered business (under FBR) to a person or business registered only in AJK fall into a unique inter-jurisdictional gap. After analyzing constitutional provisions, residency rules, FBR jurisdiction, and scope of ITO 2001:
No withholding tax is required under the FBR-administered Income Tax Ordinance 2001.
AJK withholding may apply, but it is the vendor’s responsibility, unless the payer chooses to register in AJK.
The safest non-registration method is to pay gross and obtain a vendor undertaking confirming that AJK taxes will be paid directly.
This approach is legally, constitutionally, and administratively aligned with the current practices of both FBR and AJK CBR.
