Pakistan’s tax enforcement landscape is expected to become more aggressive in the upcoming fiscal year, with the Federal Board of Revenue (FBR) increasingly using its legal authority to recover unpaid taxes through third parties. This means that individuals or organizations holding money for tax defaulters—sometimes without even realizing it—could be required to pay outstanding tax dues directly to the government.
Under the Income Tax Ordinance, 2001, the FBR is not limited to pursuing defaulting taxpayers alone. Section 140 empowers tax authorities to approach any person who owes money to a defaulter or has control over funds that are due to them. This provision significantly broadens the scope of tax recovery and places added responsibility on businesses, banks, employers, and other entities involved in financial transactions.
The law defines “person” in wide terms, covering not only individuals and companies but also financial institutions, courts, tribunals, and public bodies. As a result, recovery notices may be issued to employers paying salaries, banks holding accounts, business partners settling invoices, or authorities processing payments for taxpayers in default.
The recovery process begins when the Commissioner issues a formal written notice specifying the tax amount to be recovered and the deadline for payment. Once served, the notice carries legal force, and failure to comply can result in serious consequences. However, there is limited relief where the taxpayer has challenged the assessment before the Commissioner (Appeals) and deposited at least 10 percent of the disputed tax. In such cases, recovery from third parties is suspended while the appeal remains pending.
To prevent excessive recovery, the law places clear limits on the amounts that can be collected from third parties. If the funds held are less than the outstanding tax, recovery is restricted to that amount. If the funds exceed the tax demand, the FBR may recover only the tax due, not the surplus. Where payments are made on a recurring basis—such as salaries, retainers, or commissions—the FBR may instruct the payer to deduct a fixed amount from each payment until the liability is cleared.
The law also ensures that third parties are not forced to pay before the funds become legally payable to the taxpayer. Recovery can only be enforced when the money actually falls due. Any amount collected under Section 140 is treated in the same way as withholding tax, and standard deduction rules apply.
Importantly, third parties who comply with a recovery notice are protected by law. Once payment is made in accordance with the Commissioner’s instructions, it is considered a payment made on behalf of the taxpayer. The taxpayer cannot later demand the same amount, and the official receipt serves as full legal protection for the payer.
In large and long-running tax disputes, the FBR’s powers are even stronger. Section 140(6A) allows immediate recovery where a tax demand has been upheld by three appellate forums, including the High Court, the confirmed liability exceeds Rs. 200 million, and recovery is limited to the lowest upheld amount. In such cases, the FBR does not need to wait for appeal limitation periods to expire.
As enforcement tightens in FY2026, third parties must remain cautious. Maintaining proper documentation, monitoring outstanding tax issues linked to business partners or employees, responding promptly to FBR notices, and seeking professional tax advice can help avoid unexpected liabilities.
The takeaway is clear: tax recovery laws in Pakistan extend beyond the taxpayer in default. In the coming fiscal year, third parties who hold or manage a defaulter’s funds may find themselves legally responsible for unpaid taxes, making awareness and timely compliance more important than ever.