Among the myriad provisions of Pakistan’s tax laws, perhaps one of the more important is Section 138 which deals with enforcement and recovery from noncompliant taxpayers. Under the Income Tax Ordinance, 2001, Section 138 gives legal backing to the tax authorities for recovery of dues through a coordinated mechanism. This article covers Section 138, tax recovery under section 138, and consequences thereupon with due reference to Section 138 of Income Tax Act penalty on dishonor. Whether you are a citizen, taxpayer, employer or a tax consultant, it’s important to have sufficient knowledge about Income Tax Ordinance’s Section 138.
What is Section 138 of the Income Tax Ordinance?
The provided text outlines the legal provisions for the recovery of tax dues by a commissioner from a taxpayer, as well as related procedures. Here’s a summary:
Notice of payment (Section 138):The Commissioner has power to serve a notice on a taxpayer in the prescribed form and requiring such person to pay within such time as is specified in the notice mentioning therein and forthwith all moneys outstanding under this Act.
Recovery Methods: In case the taxpayer could not pay within the specified or extended period, the Commissioner assesses him on the amount and can recover it in any of these ways:
Attachment and Sale: Attaching of the movable or immovable property (of the taxpayer) followed by its sale.
Receiver Appointment: Appointment of a receiver to take over and manage the taxpayer’s assets.
Arrest and Detention:The jailing of the taxpayer for six months.
Other modes:Additional recovery methods as specified under the Sales Tax Act, 1990.
Powers of Commissioner: The Commissioner shall have the like powers as are vested in a Civil Court under the Code of Civil Procedure, 1908, for the purpose of enforcing the recovery of any amount due under a decree.
Rule Making: The Board may promulgate rules governing the procedure for payment and collection of taxes.
Recovery by District Officer (Revenue) (Section 138A): –
The Commissioner may also transmit to the District Officer (Revenue) in any district where the taxpayer resides, carries on business or owns property a certificate setting forth the amount of tax due.
The amount shall be recoverable by the District Officer as if it were arrears of land revenue, with the powers of a Civil Court under the Code of Civil Procedure, 1908.
Estate in Bankruptcy (Section 138B):
A taxpayer’s tax debt becomes part of the bankruptcy estate if they become bankrupt.
The estate’s tax liability is treated as ordinary and necessary business expenses and given priority over the claims of other creditors.
This structure provides strong tax-recovery measures, such as escalating notices, property actions, and incarceration, and cooperation with revenue departments or bankrupt estates.
The Purpose of Section 138
The main objective behind this provision is to enable speedy recovery of tax arrears so as to avoid undue delays that will disturb the financial position of the Government. When tax-to-GDP ratios continue to be below targets in these tax systems, measures such as this discourage intentional non-payment and encourage willing compliance.
The CIR can serve as a notice under Section 138 in a prescribed form requiring payment within a set period often between 15 and 30 days, corresponding to the facts of each case. This notice is a formal wakeup call that taxpayers now have an available opportunity to resolve liabilities before harsh actions follow. The idea is deterrence: by setting the stages of recovery section 138 acts as a spur to do the needful and protects against arbitrary enforcement.
Secondly, the provision of Section138 is in harmony with above broader fiscal reforms including amendments made by the Finance Act, 2024 on such fiscal reform brought through the Tax Laws (Amendment) Ordinance, 2025 as well. These amendments stress quick recoverability of taxes after assessment, over-riding the interregnum of period consumed in appeal proceedings or court stay in some cases. This development emphasizes FBR’s willingness to modernize tax recovery and makes Section 138 a pivot of modern-day tax recovery by way of Section 138.
How Tax Recovery Works Through Section 138
Tax recovery through Section 138 is a multi-tiered process, empowering the CIR with civil court-like authority under the Code of Civil Procedure, 1908 (CPC). Here’s a step-by-step breakdown:
Issuance of Demand Notice:
CIR serves as a notice under sub section (1) of section 138, addressing the issue of tax amount and time limit. This is the first line of defense, often sent via registered post or email for traceability.
Non-Payment Outcome:
If unpaid within the timeframe (or extended period granted by the CIR), sub-section (2) activates recovery modes
Attachment and Sale of Property:
The movable/immovable property can be attached and sold; it is in the nature of decree execution under Order 21 CPC.
Garnishee Proceedings:
Third party debtors of the taxpayer (e.g. banks) are ordered to pay directly to the FBR.
Arrest and Detention:
In extreme cases, the taxpayer can be arrested and detained for up to six months, akin to civil imprisonment for debt recovery.
Delegation to District Officer (Revenue):
A supplementary provision under Section 138A of the Act, whereby the CIR may certify dues payable by a person (i.e., as arrears from land revenue) to be collected by the district officer who would attach agricultural land or other district level properties.
The author suggests that Section 138’s recovery process should be based on due process, with coercive means halted during appeals to the Commissioner. After 2025 amendments, taxes can be recovered on High Court or Supreme Court judgment.
Consequences of Defiance:
Though Section 138 is purely a civil one, its non-compliance can have grave consequences, i.e. Section 138 of Income Tax Act punishment. The term ‘Income Tax Act’ used therein is consistent with the Ordinance and that the `punishment’ is one of recovery and not an independent criminal penalty.
Civil Penalties:
The most direct “punishment” is asset attachment and sale, which can cripple businesses. For instance, failure to pay can result in bank account freezes or property auctions, leading to financial distress.
Imprisonment:
Under clause (2)(c), the power is given to detain the person for six months. It is not a criminal prosecution, but a statutory civil relief, for the recalcitrant defaulter. The courts have supported this, even in the one that came before the ATIR emphasizing proportionality.
Compounding and Interest:
So long as there is an overdue tax, the default surcharge under Section 205 (up to 1.2% per month) compounds the liability. Furthermore, fees for recovery procedures are an additional burden.
Though, Section 138 of the Income Tax Act penalty is a last resort. Data from the FBR shows that thousands of recovery notices are issued every year, but many are resolved by settling. An FBR notification dated 2023 read, had withdrawn premature notices which were at the stage of appeal, referring to Supreme Court precedents (such as 2018 SCMR 939), demonstrating judicial control in curbing overreach.
Integrating Section 138 into Your Tax Strategy
To avoid the pitfalls of Section 138, proactive compliance is key. Businesses should:
- File returns in time and comply with orders of assessments.
- Apply for extensions or CIR installment plans before notices become enforced.
- Maintain accurate records to challenge erroneous demands during appeals.
- Seek advice from tax consultants on maximizing exemptions or reliefs under the Ordinance.
Recent improvements, such as electronic notices through the FBR Iris portal, have made the task of keeping track much easier. If Section 138 is understood as a compliance tool and not perceived simply as a weapon, taxpayers will be able to fit it comfortably into their fiscal planning.
Conclusion
Thus, the purpose of Section 138 in IT Ordinance is very simple- to double lock tax recovery under Section 138 to know that the stream resides with Pakistan. From providing demand notices to the prospect of detention, it gives officers an arsenal of enforcement tools that are in line with procedural fairness. Section 138 of the Income Tax Act punishment is a reminder to us that we have no choice on tax, but there are plenty of places to take refuge.