Section 166 of the Income Tax Ordinance 2001 establishes that tax collected or deducted is held in trust for the Federal Government and takes priority over other claims in specified circumstances.

The Federal Board of Revenue (FBR) has explained the priority of tax collected or deducted at source under Section 166 of the Income Tax Ordinance 2001 for Tax Year 2027.

According to the Ordinance, updated up to June 30, 2026, tax collected under Division II or Chapter XII, or deducted from payments under Division III or Chapter XII, must be held by the collecting or withholding person in trust for the Federal Government.

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Section 166 stipulates that such tax cannot be attached to satisfy any debt or liability of the person responsible for collecting or deducting it.

The provision also establishes safeguards in the event of liquidation or bankruptcy. Where a person who has collected or deducted tax becomes insolvent, the amount withheld will not form part of their estate available for distribution among creditors.

In such circumstances, the relevant Commissioner will have the first claim to the collected or deducted amount before any distribution of the person’s property takes place.

Furthermore, Section 166 provides that tax required to be deducted from a payment constitutes a first charge on that payment.

The tax must be deducted before any other amount that the payer is required to withhold under a court order or any other law.

These provisions establish the priority of withholding tax and seek to protect government revenue by preventing amounts collected on behalf of the Federal Government from being treated as the collecting person’s own funds.

Tax Year 2027 covers the period from July 1, 2026, to June 30, 2027.