In a move to streamline tax regulations in Pakistan, the Federal Board of Revenue (FBR) has underscored the intricacies of tax liability when an individual is state of bankruptcy.
This development comes as part of the Income Tax Ordinance, 2001, which was updated up to June 30, 2021, incorporating amendments introduced through the Finance Act, 2021.
The focal point of this discussion revolves around Section 138B of the Income Tax Ordinance, 2001. The section is a comprehensive provision that sheds light on the transfer of tax liability in the event of an individual’s declaration of bankruptcy.
Understanding Section 138B:
According to the text of Section 138B, when a taxpayer is declared bankrupt, their tax liability under the Income Tax Ordinance is transferred to the estate in bankruptcy. This legal provision ensures that tax obligations do not dissolve with the individual’s financial insolvency but instead become an integral part of the assets and liabilities of the estate in bankruptcy.
Tax Liability as a Current Expenditure:
Section 138B further elucidates that if tax liability is incurred by an estate in bankruptcy, it is to be deemed as a current expenditure in the operations of the said estate. This classification underscores the priority of tax payment over other claims made by creditors during the settlement of the bankruptcy proceedings.
The section explicitly states that the tax owed by the estate in bankruptcy must be settled before any claims preferred by other creditors are addressed. This prioritization aims to ensure that the government, as a taxing authority, is not relegated to the position of a secondary creditor, safeguarding its interests in the collection of revenue even in the face of an individual’s financial collapse.
Implications for Bankrupt Taxpayers and Creditors:
For individuals navigating the challenging waters of bankruptcy, Section 138B brings clarity to the fate of their tax liabilities. It solidifies the notion that even in financial distress, the obligation to fulfill tax responsibilities persists and becomes an integral part of the overall bankruptcy proceedings.
From the perspective of creditors, this provision can be viewed as a safeguard mechanism. By establishing tax liabilities as a priority in the settlement process, the government aims to secure its fiscal interests and prevent any attempts to circumvent tax obligations in the midst of a bankruptcy declaration.
Conclusion:
Section 138B of the Income Tax Ordinance, 2001, serves as a crucial component in the legal framework governing taxation in Pakistan. By explicitly addressing the transfer of tax liability to the estate in bankruptcy and establishing it as a current expenditure, the provision contributes to a fair and structured approach to tax matters in times of financial upheaval. As the government continues to refine and update its tax laws, Section 138B stands as a testament to the commitment to fiscal responsibility and the equitable distribution of assets in the face of individual insolvency.
