What happens to a distributor who fails to collect or deposit 236H tax from retailers?

A distributor that sells to retailers is a collecting agent under section 236H. If it does not collect the tax, or collects it and keeps it, the Income Tax Ordinance, 2001 treats the tax as the distributor’s own debt. It also charges default surcharge for the time the money was not with the Commissioner.

What does the law say?

Four provisions work together.

Section 236H requires every manufacturer, distributor, dealer, wholesaler or commercial importer, at the time of sale to retailers, to collect advance tax at the rate in Division XV of Part IV of the First Schedule. For tax year 2027 that rate is 0.5% of the gross amount of sales.

Section 160 says tax collected under Chapter XII (which contains section 236H) “shall be paid to the Commissioner by the person making the collection or deduction within the time and in the manner as may be prescribed”.

Section 161(1) covers two failures:

• (a) failing to collect tax as required under Division II of Part V of Chapter X or Chapter XII; or
• (b) having collected the tax, failing to pay it to the Commissioner as required under section 160.

In either case “the person shall be personally liable to pay the amount of tax to the Commissioner”, who may pass an order to that effect and recover it.

Section 205(3) says a person who fails to collect tax as required under Chapter XII, or fails to pay tax collected by the due date under section 160, is liable for default surcharge at 12 per cent per annum on the unpaid amount. It runs from the date the amount was required to be collected to the date it is paid to the Commissioner.

How does it work in practice?

The safeguards and side-routes in section 161 matter as much as the main rule:

• Hearing first. Section 161(1A) bars recovery until the distributor has had an opportunity of being heard.
• Retailer already paid. Section 161(1B) says that if the tax has meanwhile been paid by the retailer, nothing is recovered from the distributor. Default surcharge still applies at 12 per cent per annum from the date of failure to the date the tax was paid.
• Right to recover. Section 161(2) entitles the distributor, once made liable, to recover the tax from the retailer from whom it should have been collected.
• Commissioner’s alternative. Section 162(1) lets the Commissioner recover the uncollected amount directly from the retailer. Section 162(2) says that does not absolve the person who failed to deduct from default surcharge or other legal action. Note that sub-section (2) is worded for failures “to deduct” under Division III or Chapter XII.
• Amended orders. Section 161(3) lets the Commissioner amend a recovery order that is erroneous and prejudicial to revenue, again only after a hearing.

Worked example (illustrative figures)

Zafar Distributors in Faisalabad supplies soap and detergent to about 200 kiryana shops. In one month it invoices Rs. 20,000,000 to retailers and forgets to add 236H tax.

Step 1: the tax that should have been collected. 20,000,000 × 0.5% = Rs. 100,000.

Step 2: personal liability. Under section 161(1)(a), after a hearing, the Commissioner can order Zafar Distributors to pay Rs. 100,000 itself.

Step 3: default surcharge. Suppose the amount is paid six months after the sales. Section 205(3) charges 12 per cent per annum. As a simple pro-rata illustration: 100,000 × 12% × 6 ÷ 12 = Rs. 6,000. Section 205(3) states the rate and the start and end dates; it does not set out a day-count method, so the exact figure depends on the actual dates.

Step 4: recovering from shops. Section 161(2) lets Zafar Distributors recover the Rs. 100,000 from the retailers concerned. Whether that is practical with 200 small customers is a commercial question the law does not answer.

What if …?

What if I collected the tax but paid it late? That is section 161(1)(b). You are personally liable for any amount not paid, and section 205(3) runs default surcharge from the date the amount was required to be collected until it reaches the Commissioner.

What if the retailer claims credit for tax I never deposited? Section 236H(2) gives the retailer credit for tax “collected”. Whether a retailer’s credit is affected by the collector’s failure to deposit is not addressed in sections 161 or 236H.

What if the Commissioner’s order is wrong? Section 161(1A) guarantees a hearing before recovery. Appeal routes are in other parts of the Ordinance and are not covered on this page.

Common mistakes

• Treating 236H as the retailer’s problem. The duty to collect is on the seller, and section 161 makes the seller liable.
• Thinking late payment only costs surcharge. Unpaid collected tax is also recoverable in full under section 161(1)(b).
• Assuming a paid-up retailer ends the matter. Under section 161(1B) default surcharge still runs for the period of default.
• Computing tax on the net price. Division XV applies to the gross amount of sales.

What to check in the official text

Read sections 160, 161, 162 and 205(3) together with section 236H. Section 160 leaves the time and manner of payment to be prescribed; those requirements are in the Income Tax Rules, 2002 and are not set out here. Penalties under other provisions of the Ordinance are a separate matter and are not covered on this page.