FBR explains how unpaid withholding tax can be recovered directly from the person who should have paid it, while the person responsible for failing to deduct tax may face additional legal consequences.
ISLAMABAD: The Federal Board of Revenue (FBR) has explained the procedure for recovering tax that was not collected or deducted at source under Section 162 of the Income Tax Ordinance, 2001, for tax year 2027.
The Income Tax Ordinance, 2001, updated up to June 30, 2026, covers tax year 2027, which runs from July 1, 2026, to June 30, 2027. Section 162 empowers the Commissioner of Inland Revenue to recover unpaid tax directly from the person from whom it should have been collected or to whom the relevant payment was made.
FBR’s powers to recover tax under Section 162
Under Section 162(1), where a person fails to collect tax as required under Division II of the relevant Part or Chapter XII, or fails to deduct tax from a payment under Division III or Chapter XII, the Commissioner may issue an order for recovery.
The Commissioner may recover the amount that was not collected or deducted from:
• The person from whom the tax should have been collected; or
• The person to whom the payment was made and from whose payment tax should have been deducted.
This provision enables the tax authorities to pursue the underlying tax liability directly from the relevant taxpayer or payment recipient when the person responsible for collecting or deducting the tax fails to fulfil that obligation.
The recovery mechanism applies to tax collection and deduction requirements prescribed under the relevant provisions of the Income Tax Ordinance, 2001.
Recovery does not protect the person who failed to deduct tax
Section 162(2) clarifies that recovering tax from the relevant person does not absolve the person who failed to deduct tax from other legal consequences arising from the default.
Where a person was required to deduct tax under Division III or Chapter XII but failed to do so, the recovery of the tax from the recipient does not automatically eliminate the withholding agent’s exposure to further action.
The provision identifies three potential consequences:
1. Other legal action
The person responsible for failing to deduct tax may remain subject to other legal action relating to the failure, as provided under the Ordinance.
2. Default surcharge
The withholding agent may remain liable for default surcharge under the applicable provisions of the Ordinance. Recovery of the underlying tax from the recipient does not, by itself, extinguish this potential liability.
3. Disallowance of expense deduction
The tax authorities may also disallow a deduction for the expense to which the withholding tax default relates, where the relevant provisions of the Ordinance provide for such disallowance.
These consequences mean that the recovery of tax from the recipient does not necessarily settle all issues arising from the original failure to deduct tax.
Difference between Sections 161 and 162
Sections 161 and 162 address different aspects of withholding tax defaults.
Section 161 deals with the personal liability of a person who fails to collect or deduct tax, or who collects or deducts tax but fails to deposit it with the Commissioner. It provides the basis for recovery from that person, subject to the applicable legal requirements.
Section 162, by contrast, enables the Commissioner to recover tax that was not collected or deducted directly from the person from whom it should have been collected or to whom the relevant payment was made.
Section 162(2) further makes clear that recovery from the recipient does not automatically shield the person who failed to deduct tax from other legal action, default surcharge or the disallowance of the related expense deduction, where applicable.
Implications for businesses and taxpayers in tax year 2027
Section 162 reinforces the responsibility of businesses and other withholding agents to comply with tax deduction and collection requirements under the Income Tax Ordinance, 2001.
Where tax is not deducted or collected, the Commissioner may seek recovery from the relevant recipient or taxpayer. At the same time, the person responsible for the failure may continue to face additional financial or legal consequences under the Ordinance.
Businesses should therefore ensure that withholding tax obligations are correctly identified, deductions and collections are made where required, and the relevant amounts are deposited in accordance with statutory requirements.
For tax year 2027, Section 162 provides the FBR with a mechanism to pursue tax that was not collected or deducted while preserving the possibility of further action against the person responsible for the original default.