Karachi, September 21, 2024 – The Federal Board of Revenue (FBR) has issued an updated explanation on the definition of a “person” for the purposes of tax treatment under Section 80 of the Income Tax Ordinance, 2001. This revision, updated up to June 30, 2024, clarifies who qualifies as a “person” and is thereby subject to tax under the laws of Pakistan.
The comprehensive definition of “person” serves as a fundamental reference point for determining tax liabilities. According to Section 80 of the Income Tax Ordinance, 2001, the term “person” encompasses a wide array of entities. The broad scope ensures that various types of organizations, governmental bodies, and individuals are adequately accounted for under tax regulations.
Categories Defined as Persons
The FBR’s Section 80 explicitly defines several categories of entities that are treated as “person” under tax law. These categories include:
1. Individuals: An individual is recognized as a person, and their income is subject to tax according to their earnings and relevant tax slabs.
2. Companies or Associations of Persons (AOPs): This includes companies or AOPs that are incorporated, formed, organized, or established either in Pakistan or in foreign jurisdictions. AOPs are typically non-incorporated entities that include groups of individuals or entities coming together for a common purpose, such as firms or partnerships.
3. Governmental Bodies and International Organizations: The ordinance also includes the Federal Government, any foreign government, political subdivisions of foreign governments, and public international organizations. This ensures that any financial or business activities that such entities engage in within Pakistan are subject to relevant tax provisions.
Further Clarifications under Section 80
To provide more detailed insights, Section 80 further breaks down the components of the definition of a “person,” adding specific categories for AOPs, companies, firms, trusts, and unit trusts:
• Association of Persons (AOPs): This includes not just traditional partnerships and firms, but also Hindu undivided families, artificial juridical persons, and bodies of persons formed under foreign laws. However, companies are excluded from this category.
• Companies: The term “company” is expansive and includes:
o Entities defined under the Companies Act, 2017.
o Bodies corporate formed under any Pakistani law.
o Modarabas, co-operative societies, finance societies, and any other societies.
o Non-profit organizations, trusts, and entities established under Pakistani or foreign law.
o Foreign associations, whether incorporated or not, that are declared as companies by the FBR through specific orders.
o Provincial and Local Governments in Pakistan.
o Small companies, as defined in Section 2 of the Income Tax Ordinance.
• Firms: A firm, for tax purposes, refers to a relationship between persons who have agreed to share the profits of a business carried out by some or all of them, acting as a collective entity.
• Trusts and Unit Trusts: Trusts are also recognized as persons for tax purposes, and the term includes unit trusts, where beneficial interests are divided into units. This ensures that income and capital distributions made to beneficiaries are adequately captured under tax law.
Implications of the Broad Definition
The inclusive definition of “person” under Section 80 is crucial for tax administration, as it ensures that a wide range of entities and individuals fall under the tax net. This broad scope allows for better regulation and tax collection from various forms of income, whether derived from business activities, investments, or other sources.
By covering individuals, companies, AOPs, trusts, and various governmental and international entities, the FBR aims to enforce tax compliance across all segments of the economy. This comprehensive categorization ensures that all types of taxpayers are treated fairly, and it prevents loopholes that might allow certain entities to escape taxation.
Conclusion
The updated explanation of “person” under Section 80 of the Income Tax Ordinance, 2001, underscores the FBR’s commitment to maintaining a broad and inclusive tax regime. By clearly defining the categories of individuals and entities subject to tax, the FBR seeks to promote transparency and fairness in Pakistan’s tax system.
