ISLAMABAD: In tax year 2026, individuals and entities holding money on behalf of tax defaulters may also face recovery action, as Pakistan’s tax laws empower the Federal Board of Revenue (FBR) to collect unpaid taxes directly from third parties. Under the Income Tax Ordinance, 2001, the FBR is authorized to recover outstanding tax dues not only from defaulting taxpayers but also from those who owe, hold or control money payable to them.
This authority is exercised under Section 140 of the Ordinance, which allows the tax authorities to issue recovery notices to any “person” connected with a defaulter’s funds. The law defines a person broadly, covering individuals, companies, banks, courts, tribunals and public authorities.
The recovery process begins when the Commissioner issues a written notice specifying the amount to be paid and the time within which payment must be made. Once such a notice is served, compliance becomes a legal obligation. However, the law provides limited protection where the taxpayer has filed an appeal before the Commissioner (Appeals) under Section 127 and has paid at least 10 per cent of the disputed tax; in such cases, recovery through third parties is barred while the appeal remains pending.
The amount recoverable from a third party is capped. Where the money held is equal to or less than the tax due, recovery is restricted to that amount. If the money held exceeds the outstanding tax, recovery is limited to the tax liability only. In cases involving salaries or other periodic payments, the FBR may direct the payer to deduct a specified amount from each payment until the full tax demand is recovered.
The law also safeguards third parties against premature demands. Recovery cannot be enforced before the money becomes payable to the taxpayer, and payment is required only when the funds fall due. Amounts recovered under Section 140 are treated in the same manner as tax deducted at source, with relevant withholding rules applying.
Importantly, third parties who comply with a recovery notice are granted legal protection. Payment made in accordance with the Commissioner’s directions is deemed to have been made on behalf of the taxpayer, and the official receipt serves as a valid discharge of liability. The taxpayer cannot legally demand the same amount again from the third party.
A special and more stringent provision applies in large tax cases. Under Section 140(6A), immediate recovery may be initiated where the dispute has been decided in favor of the FBR by three appellate forums, including the High Court, the confirmed tax demand exceeds Rs. 200 million, and recovery is limited to the lowest upheld amount. In such cases, the FBR is not required to wait for the expiry of limitation periods.
With enhanced enforcement measures expected in tax year 2026, businesses, employers, banks and even individuals could face recovery proceedings for holding defaulters’ funds, even unintentionally. Tax experts advise maintaining clear financial records, responding promptly to any notice issued by the FBR, confirming the status of any pending appeals and seeking professional advice where necessary.
The key message for tax year 2026 is that recovery powers under Section 140 extend beyond defaulters themselves. Ignoring a recovery notice can expose third parties to legal and financial risk, making timely compliance and informed action essential.
