Section 205 of the Income Tax Ordinance sets out penalties for late tax payments, unpaid advance tax and failures to collect or deposit withholding tax.
The Federal Board of Revenue (FBR) has warned taxpayers that failure to pay income tax, penalties or other specified amounts by the prescribed deadlines may attract a default surcharge of 12 per cent per annum or KIBOR plus 3 percentage points, whichever is higher, during tax year 2027.
The provision is contained in Section 205 of the Income Tax Ordinance, 2001, updated up to June 30, 2026. Tax year 2027 runs from July 1, 2026, to June 30, 2027.
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The section establishes different default surcharge rules for outstanding tax liabilities, advance tax shortfalls and withholding tax obligations.
Default surcharge on unpaid tax and penalties
Under Section 205(1), a person who fails to pay tax, a penalty or an amount specified under Sections 140 or 141 by the due date becomes liable to pay a default surcharge at the higher of 12 per cent per annum or KIBOR plus three percentage points.
The surcharge is calculated on the unpaid amount for the period beginning on the payment due date and ending when the amount is paid.
The provision excludes advance tax payable under Section 147 and default surcharge itself from this general calculation, as advance tax is covered by separate rules under Section 205.
The FBR may assess the surcharge in accordance with the ordinance’s provisions governing tax assessments.
Separate rules for advance tax defaults
Section 205(1A) provides for a default surcharge of 12 per cent per annum where a taxpayer fails to pay advance tax under Section 147.
The surcharge applies to the unpaid amount from its due date until the date of payment or the due date for filing the income tax return for the relevant tax year, whichever occurs earlier.
Under Section 205(1B), a further rule applies where a taxpayer fails to pay advance tax under the specified provisions of Section 147, or the amount paid is less than 90 per cent of the tax chargeable for the relevant tax year.
In such cases, a surcharge of 12 per cent per annum applies to the relevant unpaid amount or shortfall. It is calculated from April 1 of the relevant year until the assessment date or June 30 of the following financial year, whichever occurs earlier.
For taxpayers following a special tax year, the calculation begins on the first day of the fourth quarter and ends on the assessment date or the last day of that special tax year, whichever comes first.
Penalties for withholding tax failures
The ordinance also imposes a default surcharge where a person fails to collect or deduct tax as required under the relevant provisions, or fails to deposit tax already collected or deducted by the due date.
Under Section 205(3), the surcharge is charged at 12 per cent per annum on the unpaid amount. The calculation period begins when the tax was required to be collected or deducted and ends when the amount is paid to the Commissioner.
These provisions are particularly relevant to businesses and other withholding agents responsible for collecting, deducting and depositing tax on behalf of the government.
Default surcharge may be reduced or refunded
Section 205 also provides relief in certain circumstances.
Under subsection (2), any default surcharge paid must be refunded to the extent that the underlying tax, penalty or other amount is subsequently held not to be payable.
Section 205A further states that where an order under the ordinance reduces the tax or penalty on which a default surcharge was charged, the surcharge must be reduced accordingly.
The Commissioner may also assess default surcharge for the entire default period or part of it even if the outstanding tax has not yet been paid.
Relief following an appellate order
Section 205 contains a specific concession for certain taxpayers who pay tax following an order under Section 129.
Where the taxpayer pays by the deadline specified in the resulting notice under Section 137(2) and does not file a further appeal under Section 131, the taxpayer may avoid default surcharge for the specified period covered by the concession.
Taxpayers should therefore review their payment deadlines, advance tax obligations and withholding tax responsibilities to avoid additional liabilities during tax year 2027.
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