Written by Akhter Syed in Taxation Section 205 of the Income Tax Ordinance sets out penalties for late tax payments, unpaid advance tax and failures to collect or deposit withholding tax. The Federal Board of Revenue (FBR) has warned taxpayers that failure to pay income tax, penalties or other specified amounts by the prescribed deadlines may attract a default surcharge of 12 per cent per annum or KIBOR plus 3 percentage points, whichever is higher, during tax year 2027. The provision is contained in Section 205 of the Income Tax Ordinance, 2001, updated up to June 30, 2026. Tax year 2027 runs from July 1, 2026, to June 30, 2027. The section establishes different default surcharge rules for outstanding tax liabilities, advance tax shortfalls and withholding tax obligations. Default surcharge on unpaid tax and penalties Under Section 205(1), a person who fails to pay tax, a penalty or an amount specified under Sections 140 or 141 by the due date becomes liable to pay a default surcharge at the higher of 12 per cent per annum or KIBOR plus three percentage points. The surcharge is calculated on the unpaid amount for the period beginning on the payment due date and ending when the amount is paid. The provision excludes advance tax payable under Section 147 and default surcharge itself from this general calculation, as advance tax is covered by separate rules under Section 205. The FBR may assess the surcharge in accordance with the ordinance’s provisions governing tax assessments. Separate rules for advance tax defaults Section 205(1A) provides for a default surcharge of 12 per cent per annum where a taxpayer fails to pay advance tax under Section 147. The surcharge applies to the unpaid amount from its due date until the date of payment or the due date for filing the income tax return for the relevant tax year, whichever occurs earlier. Under Section 205(1B), a further rule applies where a taxpayer fails to pay advance tax under the specified provisions of Section 147, or the amount paid is less than 90 per cent of the tax chargeable for the relevant tax year. In such cases, a surcharge of 12 per cent per annum applies to the relevant unpaid amount or shortfall.…