Shazia Ramzan
For the first time, Pakistan’s government has turned its full attention toward the digital economy. With the unveiling of the federal budget for fiscal year 2025–26, a comprehensive tax framework has been proposed that seeks to bring online commerce, food delivery, digital entertainment, and foreign digital advertising under the tax net. While the aim of increasing revenue from a growing sector is justifiable, the manner and timing of these measures raise critical concerns.
Under the new tax regime, local e-commerce sellers will face a tax ranging from 0.25% to 2% on all digitally ordered goods and services. In addition, every digital transaction will now attract a flat 2% sales tax. Sellers—whether large-scale platforms or individual home-based entrepreneurs—will be required to present income and sales tax registration to continue operations online. Foreign sellers have not been excluded either. A new 5% tax will be levied on all payments made to overseas vendors for goods and services purchased by Pakistani consumers. Moreover, global tech companies running online advertisements targeting Pakistani users will be required to pay 5% of their gross ad revenue to the state.
These measures are wide-reaching, and their impact will be immediate and significant. Primarily, it is the younger, tech-savvy generation—already burdened by economic uncertainty—who will bear the brunt of these taxes. E-commerce is not a luxury in Pakistan; it is increasingly a lifeline. For students freelancing online, women running home-based craft stores, or part-time riders delivering food to make ends meet, this space has offered flexibility, dignity, and economic agency. Taxing these already fragile income streams without offering structural support is likely to push many informal digital actors back into the shadows—or out of business altogether.
The compliance burden is another major red flag. The requirement for formal tax registration as a precondition for digital activity is not inherently unreasonable. However, it is out of touch with the realities faced by Pakistan’s informal digital economy. A vast number of sellers operate at micro-levels—earning irregular or modest amounts. Forcing them to register under a system that is already complex, bureaucratic, and often perceived as predatory may discourage rather than encourage tax compliance.
Then there’s the matter of enforcement. Courier companies and digital service providers have been tasked with collecting some of these taxes. Do they even have the logistical systems or administrative training to implement such responsibilities accurately and fairly? If the burden of implementation is passed to intermediaries without support or clarity, it is likely to result in operational chaos, transaction delays, and legal complications. Small sellers could be de-platformed without understanding why, while larger platforms might face service disruptions due to non-compliance or conflicting interpretations of the new tax rules.
Foreign companies will not be spared the confusion. Asking global firms to pay a percentage of their gross ad spend targeting Pakistani users sounds effective on paper, but in practice, it raises jurisdictional and operational challenges. How will enforcement be ensured? Will global tech companies comply or choose to restrict access instead? Will this lead to a digital divide that affects Pakistani consumers disproportionately?
The government’s desire to expand its tax base is not misplaced. Pakistan’s tax-to-GDP ratio is among the lowest in the region, and the informal economy—which includes significant digital transactions—must eventually be documented. But timing and strategy are everything. At a time when real incomes are declining, inflation is high, and job creation is stagnant, these heavy-handed and poorly calibrated policies could stifle the very sector that offers economic resilience and innovation.
Rather than taxing the digital economy into retreat, the government must adopt a phased, consultative approach. Begin with voluntary compliance incentives for small and micro digital sellers. Streamline the tax registration process through easy-to-use digital portals. Introduce thresholds that exempt sellers below a certain income bracket. Provide clarity to intermediaries like courier and payment gateway companies. Most importantly, protect small sellers from excessive scrutiny and penalties in the early stages of this policy shift.
This budget’s e-commerce tax regime risks undermining an ecosystem that has been organically growing despite economic instability and institutional neglect. A progressive digital tax strategy should nurture innovation, not penalize it. Pakistan has long struggled to embrace the potential of a digital economy. This was an opportunity to finally do it right—but instead of enabling digital inclusion, the current approach risks creating a digitally taxed underclass.
Unless carefully reviewed and restructured, these new policies may backfire—leading not to greater compliance, but to deeper mistrust in the system, reduced online activity, and the slow death of digital entrepreneurship in Pakistan.
