FBR explains personal liability for failure to collect or deposit withholding tax, the 12% annual default surcharge and taxpayers’ right to a hearing under Section 161.
ISLAMABAD: The Federal Board of Revenue (FBR) has outlined the legal consequences for persons who fail to collect or deduct tax, or collect or deduct tax but fail to deposit it with the government, under Section 161 of the Income Tax Ordinance, 2001, for tax year 2027.
According to the Income Tax Ordinance, 2001, updated up to June 30, 2026, tax year 2027 runs from July 1, 2026, to June 30, 2027. Section 161 establishes personal liability for withholding tax defaults and empowers the Commissioner of Inland Revenue to order recovery of the unpaid amount.
Personal liability for withholding tax defaults
Under Section 161(1), a person becomes personally liable to pay the relevant amount of tax to the Commissioner if they:
• Fail to collect tax where required under Division II of the relevant Part or Chapter XII of the Ordinance.
• Fail to deduct tax from a payment where required under Division III or Chapter XII.
• Collect or deduct tax but fail to deposit it with the Commissioner in accordance with Section 160.
• Fail to deposit tax collected under Section 50(8) of the repealed Income Tax Ordinance, as required under the previous law.
In such circumstances, the Commissioner may issue an order making the person personally liable for the tax and initiate recovery proceedings for the outstanding amount.
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The provision places responsibility on persons required to collect or deduct withholding tax to comply with their statutory obligations and ensure that the relevant amounts reach the government.
FBR must provide an opportunity of hearing
Section 161(1A) protects the person facing recovery proceedings by requiring the tax authorities to provide an opportunity of being heard before recovery under subsection (1).
This means the Commissioner cannot proceed with recovery under this provision without first giving the person concerned an opportunity to present their position.
The hearing requirement provides an opportunity to explain the circumstances of the default and address the proposed recovery before the authorities take further action.
No recovery of tax already paid by the recipient
Section 161(1B) provides relief where the tax that should have been deducted or collected has subsequently been paid by the relevant taxpayer.
If, at the time of recovery, it is established that the person from whom the tax should have been collected or deducted has already paid that tax, the authorities cannot recover the same tax amount again from the person who failed to collect or deduct it.
However, the person responsible for the original failure remains liable to pay a default surcharge at the rate of 12% per annum.
The surcharge is calculated from the date on which the person failed to collect or deduct the tax until the date the tax was actually paid.
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This provision distinguishes between recovery of the underlying tax and the surcharge arising from the withholding agent’s failure to fulfil the statutory obligation on time.
Right to recover tax from the relevant person
Section 161(2) allows a person held personally liable for tax because of a failure to collect or deduct it to recover that amount from the person from whom the tax should originally have been collected or deducted.
This provision recognises the withholding agent’s right to seek reimbursement of the tax amount for which they have become personally liable.
However, the right to recover the amount from the relevant person does not remove the withholding agent’s obligations under the Ordinance or automatically eliminate liability arising from the original default.
Commissioner empowered to amend recovery orders
Section 161(3) authorises the Commissioner to amend or further amend an order of recovery issued under subsection (1) after making, or arranging, any enquiries considered necessary.
The Commissioner may exercise this power where the existing order is considered erroneous insofar as it is prejudicial to the interests of revenue.
However, the law expressly requires the person concerned to be given an opportunity of being heard before the recovery order is amended.
This requirement ensures that the person affected has an opportunity to respond before an amendment is made.
What Section 161 means for withholding agents in tax year 2027
Section 161 reinforces the responsibility of employers, businesses and other persons required to collect or deduct tax at source to comply with the withholding tax provisions of the Income Tax Ordinance, 2001.
Failure to collect or deduct tax, or failure to deposit tax already collected or deducted, can result in personal liability and recovery proceedings initiated by the Commissioner.
Where the underlying tax has already been paid by the recipient, the withholding agent may avoid recovery of that tax amount but can remain liable for a 12% annual default surcharge for the period specified in the law.
The provision also establishes procedural safeguards, including the right to a hearing before recovery and before an adverse amendment to a recovery order.
Persons responsible for withholding tax should therefore ensure that deductions and collections are made correctly, deposited within the applicable statutory deadlines and supported by appropriate records to reduce the risk of recovery proceedings and additional financial liabilities.