Withholding tax serves as a critical tool for the Federal Board of Revenue (FBR) to collect revenue efficiently throughout the tax year. However, situations often arise where a person responsible for deducting or collecting tax fails to do so.
In such cases, Section 162 of the Income Tax Ordinance, 2001 empowers the Commissioner Inland Revenue to recover the unpaid tax directly from the person from whom tax should have been collected or to whom the payment was made.
This section ensures that government revenue is protected and non-compliance in tax withholding does not go unaddressed.
Legal Text of Section 162: Recovery of Tax from the Person from whom Tax was not Collected or Deducted
“Where a person fails to collect tax as required under Division II or Chapter XII, or deduct tax from a payment as required under Division III or Chapter XII, the Commissioner may pass an order to that effect and recover the amount not collected or deducted from the person from whom the tax should have been collected or to whom the payment was made.”
1. Core Objective of Section 162
The primary intent of this section is to ensure tax recovery continuity even in cases of withholding failure. It enables the Commissioner to:
Safeguard tax revenue that should have been withheld at source;
Enforce compliance among withholding agents; and
Prevent evasion through procedural neglect or oversight.
2. Scope of Applicability
Section 162 applies to all cases under:
Division II — Collection of Tax at Source, and
Division III — Deduction of Tax at Source,
including relevant provisions under Chapter XII (Advance Tax Collection and Deduction).
It extends to every withholding agent, payer, or collector responsible under the law.
3. Commissioner’s Power of Recovery
When a withholding agent fails to collect or deduct tax, the Commissioner Inland Revenue has the authority to:
Issue an order determining the default;
Recover the tax from the person from whom it should have been collected, or to whom payment was made;
Initiate legal recovery proceedings under Sections 137 to 140 of the Ordinance.
This ensures that the ultimate taxpayer bears the correct tax burden, even if the withholding intermediary defaults.
4. Non-Exemption from Legal Consequences
Under Section 162(2), recovery of tax does not absolve the withholding agent from further consequences, which may include:
Default surcharge under Section 205;
Disallowance of related expense under Section 21(c);
Penal action under Section 182 for failure to withhold;
Audit or investigation for non-compliance with withholding obligations.
In essence, both the payer and the payee may face consequences depending on the nature of the default.
5. Example for Illustration
Suppose Company A pays PKR 5,000,000 to a contractor but fails to deduct the applicable 7% withholding tax (PKR 350,000).
Under Section 162, the Commissioner may:
Recover PKR 350,000 directly from the contractor (payee);
Impose default surcharge on Company A; and
Disallow the entire payment as a deductible business expense in Company A’s accounts.
This ensures the tax system remains balanced and fair.
6. Relationship with Other Provisions
Section 162 operates in conjunction with other critical sections of the Ordinance:
Section 161 — Failure to deduct or collect tax;
Section 205 — Default surcharge;
Section 182 — Penalties;
Section 21(c) — Disallowance of non-deducted expenses.
Collectively, these provisions create a comprehensive compliance framework for withholding agents.
7. Key Compliance Takeaways
Always ensure timely deduction or collection of tax at prescribed rates;
Deposit the withheld tax within statutory time limits;
Maintain complete withholding records (names, CNICs, NTN, payment amounts);
Regularly reconcile withholding data with FBR statements (Section 165 statements);
Avoid making payments without ensuring the tax deduction is completed.
8. Practical Implications for Businesses
For businesses, especially those engaging contractors, suppliers, or consultants, Section 162 is a compliance checkpoint.
Failure to withhold can result in:
Financial recovery proceedings,
Tax penalties,
Reputational risks, and
Increased scrutiny during audits.
Section 162 ensures that no tax goes uncollected due to negligence or omission by withholding agents. It reinforces accountability and strengthens Pakistan’s withholding tax regime.
At Tanweer Habib & Co., we assist organizations in ensuring withholding compliance, preparing withholding statements, and defending against Section 162 recovery orders issued by the Commissioner.
FAQs on Section 162 Recovery of Tax from the Person from whom Tax was not Collected or Deducted
1. What does Section 162 of the Income Tax Ordinance, 2001 deal with?
It empowers the Commissioner to recover tax from the person from whom tax should have been collected or deducted when a withholding agent fails to do so.
2. Who is considered a withholding agent?
Any person responsible for collecting or deducting tax at source under the Ordinance.
3. When does Section 162 apply?
When a person fails to collect or deduct tax as required under Division II, Division III, or Chapter XII.
4. Can FBR recover tax from the payee directly?
Yes. The Commissioner may recover the amount from the person from whom tax should have been collected or to whom payment was made.
5. Does recovery absolve the withholding agent from liability?
No. Even after recovery, the agent may still face penalties, surcharge, or expense disallowance.
6. What is default surcharge under this section?
It refers to interest charged under Section 205 for failure to deduct or deposit tax in time.
7. Can the expense be disallowed if tax was not deducted?
Yes. The relevant payment expense may be disallowed under Section 21(c).
8. Is there a time limit for recovery under Section 162?
Yes, generally the recovery order must be issued within five years from the end of the tax year in which default occurred (per Section 174 record-keeping rules).
9. Can recovery be made if the tax was later paid voluntarily?
If payment is made before recovery proceedings, the Commissioner may consider it compliance restoration subject to verification.
10. How does this section relate to Section 161?
While Section 161 determines liability for failure to withhold, Section 162 enforces actual recovery from the payee or other responsible party.
11. What legal recourse does the taxpayer have against recovery orders?
The taxpayer may file an appeal under Section 127 before the Commissioner (Appeals) within the prescribed period.
12. What are common examples of withholding defaults?
Non-deduction on supplier payments, rent, or services.
Failure to collect advance tax on sales or contracts.
Payments without valid NTN or CNIC records.
13. Can the Commissioner recover both tax and penalties?
Yes. Tax recovery under Section 162 is in addition to penalties and surcharge.
14. What records should be maintained to avoid disputes?
Proper withholding registers, bank challans, invoices, and FBR statement acknowledgments.
15. What if the payer and payee are both non-residents?
In such cases, recovery depends on source rules — only income arising in Pakistan triggers recovery jurisdiction.
16. Can recovery orders be stayed?
Yes, upon filing an appeal, a stay of recovery may be sought from the Commissioner (Appeals) or Appellate Tribunal.
17. What is the most common business risk under Section 162?
Being held liable for tax that was never collected, resulting in double financial exposure.
18. How to ensure compliance?
Regularly audit withholding processes, train finance teams, and reconcile FBR withholding reports monthly.
19. Can this section apply to government departments?
Yes, government entities acting as withholding agents are equally liable under this provision.
20. How can Tanweer Habib & Co. assist?
We provide withholding compliance audits, legal representation before FBR, and advisory services for defense in recovery proceedings under Section 162.
