Taxing the digital frontier: Pakistan’s bold move to tap e-commerce and online revenues

In a move to increase tax collection and close long-standing loopholes, Pakistan’s 2025–26 federal budget introduces the Digital Presence Proceeds Tax Act, 2025 – a targeted move to tax revenues generated by foreign digital platforms and online vendors operating in Pakistan without a physical presence.

Part of this act is the digital transactions proceeds levy - a 5% withholding levy that will be applied to payments made to domestic and international digital vendors (e.g., Amazon, Google, Facebook, Netflix, Daraz, Temu, PakWheels) for goods or services delivered to Pakistani consumers.

The levy will apply to both physical and digital goods/services, including streaming, cloud computing, e‑learning, consultancy, online banking, architectural design, and other digitally delivered services

As per earlier reports, banks, fintech firms, and payment gateways are mandated to deduct the 5% at source when money is transferred to vendors, and must report these deductions quarterly to the FBR.

Platforms qualify for the levy if they generate more than Rs 1 million annually from Pakistani users, or have a “significant digital footprint”.

Separately, an 18% standard VAT is being proposed for online marketplaces facilitating the sale of both goods and services (e.g., Daraz, OLX, Zameen, PakWheels) which aims to standardize tax treatment and close revenue gaps—especially for platforms acting as intermediaries.

A key part of the budget is its focus on e-commerce platforms using cash-on-delivery (COD), a popular but loosely regulated channel. Foreign vendors relying on COD logistics to reach Pakistani buyers will no longer remain invisible to tax authorities. Their proceeds will now be within the tax net, aligning their obligations with those of domestic businesses.

The budget also introduces enforcement mechanisms such as track-and-trace systems, barcodes, and tax stamps to ensure compliance. By leveraging technology and data, the FBR aims to build capacity to monitor digital transactions and enforce this new regime effectively.

Significance of the law

The new law marks a critical step toward recognizing the realities of the modern economy, where global tech giants and cross-border sellers reap substantial revenues from Pakistani consumers but contribute little to the national tax base.

By establishing “digital presence” as a taxable nexus, the government aims to impose a Digital Services Tax (DST) on companies earning income through digital channels – be it through apps, marketplaces, streaming services, or cloud-based software.

In a global context, Pakistan joins countries like India, the UK, and members of the EU that have already implemented digital taxation policies to claim their fair share from the borderless digital economy.

While the OECD continues to negotiate a unified global tax framework, unilateral measures like this are increasingly seen as essential tools for emerging economies struggling with revenue shortfalls.

However, the law’s success will depend on the implementation capacity of tax authorities, coordination with financial and logistics intermediaries, and the willingness of global platforms to comply – or face potential restrictions.