Section 171 of the Income Tax Ordinance, 2001, provides compensation at KIBOR plus 0.5 percentage points per annum when eligible income tax refunds remain unpaid beyond three months.

The Federal Board of Revenue (FBR) is required to pay additional compensation to taxpayers if eligible income tax refunds are not paid within three months of becoming due during Tax Year 2027.

The FBR has issued the Income Tax Ordinance, 2001, updated up to June 30, 2026, for Tax Year 2027, covering the period from July 1, 2026, to June 30, 2027.

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Under Section 171, titled “Additional payment for delayed refunds”, the Commissioner must pay compensation at an annual rate of the Karachi Interbank Offered Rate (KIBOR) plus 0.5 percentage points on the refund amount.

The compensation period begins at the end of the three-month period and continues until the date the refund is paid.

However, the law provides an exception where there are grounds to believe that a taxpayer has claimed an inadmissible refund. In such cases, payment of the additional amount may be withheld until the investigation is completed and the claim is either accepted or rejected.

Section 171 also specifies when a refund is considered due for calculating compensation.

For refunds arising from orders issued in appeals before the Commissioner (Appeals), the Appellate Tribunal, the High Court or the Supreme Court, the refund becomes due on the date the Commissioner receives the relevant order.

In cases involving a revision order under Section 122A, the refund becomes due on the date the Commissioner issues the order. In other cases, the relevant date is when the refund order is made.

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The provision further clarifies that where a refund order is issued following an application under Section 170(1), compensation is calculated from the date the refund order is made, rather than the date on which the assessment is deemed to have been made under Section 120.

These provisions establish a statutory mechanism to compensate taxpayers for delays in receiving eligible income tax refunds.