Karachi, October 21, 2024 – The Federal Board of Revenue (FBR) has issued a new mechanism enabling the recovery of unpaid taxes through third parties. This procedure, codified under Section 140 of the Income Tax Ordinance, 2001, empowers the government to recover outstanding taxes by requiring entities or individuals holding money on behalf of the taxpayer to make direct payments to the government, according to the FBR.
The FBR said that the mechanism is designed to prevent delays in tax recovery by bypassing the taxpayer, especially in cases of default or non-compliance. Through this provision, the Commissioner of Inland Revenue can legally demand payment from third parties, such as banks or employers, who owe or hold funds for the taxpayer, thereby securing the due tax without relying solely on voluntary compliance from the taxpayer.
Broad Scope of Application According to the FBR, Section 140 is designed to capture a wide range of scenarios where third parties might owe money to a taxpayer. This includes situations where a taxpayer’s bank holds deposits or an employer owes them a salary. The Commissioner is authorized to issue a written notice demanding that such entities divert the owed amounts directly to the tax authorities to satisfy the taxpayer’s unpaid tax liability.
The FBR said that the law also covers future payments, meaning that even if a third party is scheduled to owe money to the taxpayer at a later date, they may still be required to comply. The broad definition of “person” within the law ensures that not only individuals or businesses but also courts, tribunals, and other entities are included within the scope of this recovery mechanism.
Conditions and Protections for Taxpayers Despite its wide-reaching implications, the FBR emphasized certain protections for taxpayers. A notice demanding payment from third parties cannot be issued if the taxpayer has filed an appeal against their tax assessment and has already paid 10% of the disputed tax amount. This ensures that taxpayers undergoing legitimate dispute processes are not prematurely subjected to collection actions while their appeals are pending.
Furthermore, the notice can only demand payments that are currently due or will become due. In cases where periodic payments, such as salaries, are owed to the taxpayer, the Commissioner may instruct the payer to make deductions in installments until the full amount is recovered. This incremental recovery process provides flexibility and prevents excessive financial burden on third parties.
Enforcement and Compliance Once a third party complies with the notice and makes the payment, they are legally absolved of any financial liability towards the taxpayer for the amount paid to the government. The receipt from the Commissioner serves as evidence of compliance, safeguarding third parties from future disputes. Moreover, Sections 160 to 163 of the tax law govern the withholding and deduction process in these cases, ensuring procedural integrity.
In essence, the FBR’s new enforcement strategy under Section 140 is a robust tool for ensuring tax compliance while balancing protections for both taxpayers and third parties involved in the recovery process.