New digital system will allow eligible taxpayers to settle proceedings through automated settlement offers
The Federal Board of Revenue (FBR) has issued an explanation of the Finance Act 2026, outlining a new algorithmic settlement mechanism designed to enable the digital settlement of certain tax proceedings.
The new concept has been introduced through amendments to the Income Tax Ordinance. Clause (1AA) of section 2 defines the “algorithmic settlement mechanism”, with its operation governed by the newly introduced section 134B.
Under section 134B, the FBR Board may establish a digitally operated algorithmic settlement mechanism for settling tax proceedings at any stage before an assessment or amendment of assessment under sections 121, 122 or 122E.
The mechanism will operate through a digital process and calculate a settlement offer for the taxpayer. According to the FBR’s explanation, the offer will be determined on the basis of factors including the stage of proceedings, the taxpayer’s compliance history, the nature and character of the discrepancy and any other factors considered relevant by the Board.
A taxpayer receiving an offer will have 10 days to accept it through the IRIS system. If the taxpayer agrees to the settlement, they will be required to deposit the settlement amount along with a revised return and revise the relevant return of income.
Upon acceptance of the settlement offer, the issues covered by the relevant proceedings will stand abated. These may include issues arising from a notice of selection for audit, a notice under section 111, an audit report under section 177(6) or a notice under section 122(9), as applicable.
However, the FBR clarified that acceptance of the settlement will not prevent proceedings from being initiated or continued in relation to any other issue or tax year.
The Finance Act 2026 has also introduced consequential amendments to section 114. Sub-section (6) now recognises the revision of a return where a taxpayer accepts a settlement offered through the algorithmic mechanism.
A new sub-section (6B) further provides that Commissioner approval will not be required in such cases. Taxpayers accepting the settlement will also not be liable to pay a separate penalty or default surcharge.
The new mechanism represents a shift towards digitally operated tax dispute settlement, potentially allowing eligible taxpayers to resolve specified proceedings through a structured and automated process.