The Federal Board of Revenue (FBR) has recently issued an updated definition of a company under the Sales Tax Act, 1990, effective from July 1, 2023.
This revised definition aims to provide clarity on the various entities that fall under the category of a company for the purposes of sales tax.
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Definition of a Company
According to the updated definition issued by the FBR, a company under the Sales Tax Act, 1990, encompasses the following entities:
(a) Company as per Companies Ordinance, 1984: This includes any entity defined as a company under the provisions of the Companies Ordinance, 1984. The Companies Ordinance, 1984, outlines the legal framework for the incorporation, functioning, and governance of companies in Pakistan.
(b) Body Corporate under Pakistani Laws: This includes any body corporate formed under the authority of any law in force in Pakistan. Such bodies corporate may be established for specific purposes, such as regulatory bodies, statutory authorities, or government-owned corporations.
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(c) Modaraba: A modaraba refers to an Islamic financial arrangement in which one party contributes capital, and the other party contributes expertise or management skills to undertake a specific business venture. Modarabas are regulated by the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980.
(d) Body Incorporated under Foreign Company Laws: This encompasses bodies incorporated under the law of a country outside Pakistan, specifically relating to the incorporation of companies. These entities may be foreign corporations that have a presence or operations in Pakistan.
(e) Trusts, Co-operative Societies, Finance Societies, and Other Societies: This category includes entities established or constituted under any existing law in Pakistan, such as trusts, co-operative societies, finance societies, or any other society formed for specific purposes defined by relevant legislation.
(f) Foreign Associations declared as Companies: This covers foreign associations, whether incorporated or not, that the FBR, through a general or special order, has declared to be a company for the purposes of the Income Tax Ordinance, 2001. This provision facilitates the inclusion of foreign associations as companies for income tax purposes.
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Implications for Businesses
The updated definition of a company under the Sales Tax Act, 1990, holds significant implications for businesses operating in Pakistan:
Tax Obligations: Companies falling within the defined categories are subject to sales tax obligations, including registration, reporting, and payment requirements. It is crucial for businesses to understand their classification and comply with the relevant tax regulations accordingly.
Compliance and Governance: Companies, as defined under various laws, are required to adhere to the legal and governance requirements specific to their entity type. This includes fulfilling reporting obligations, maintaining proper books of accounts, and complying with relevant regulations pertaining to their specific structure.
Legal Status and Recognition: The updated definition provides clarity on the legal status and recognition of different entities, ensuring appropriate treatment under the Sales Tax Act, 1990. It enables businesses to understand their rights and responsibilities in the tax system and establishes a consistent framework for taxation purposes.
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Conclusion
The updated definition of a company under the Sales Tax Act, 1990, broadens the scope of entities that fall within this category for sales tax purposes. By encompassing various legal entities, including companies under Pakistani law, foreign corporations, modarabas, trusts, co-operative societies, finance societies, and others, the definition ensures that the taxation framework is comprehensive and includes a wide range of business structures. It is imperative for businesses to understand their classification under this definition and comply with the relevant sales tax obligations to foster a transparent and compliant business environment in Pakistan.
