Industry Leaders Slam Pakistan’s Digital Tax Proposals in New Budget

Rizwana OmerLast Updated: Jun 12, 2025

Pakistan’s ambition to transition into a cashless, digitally driven economy is facing significant headwinds following the federal government’s decision to impose new digital taxes on digital payments, e-commerce transactions, and foreign online purchases. Industry leaders, investors, and trade bodies have expressed strong reservations, warning that the 2025-26 federal budget could stifle the country’s digital progress and hurt investor confidence.

The new Finance Bill introduces a set of measures aimed at formalizing the online economy and expanding the tax net. But critics say that the structure is overly complex and punitive, especially for small businesses and consumers, and could ultimately undermine the very objectives it aims to achieve.

A Mixed Bag of Policies

Aamir Ibrahim, Chairman of the Telecom Operators Association of Pakistan (TOAP), expressed cautious optimism but sounded alarm bells over the potential fallout. In a public statement, he said,

The budget aims to formalize online trade through digital integration and tax measures, which is a plus. However, complexity in tax collection, the 5% levy on digital transactions with foreign vendors, and additional taxes charged by payment intermediaries risk increasing costs and discouraging digital adoption. Making digital payments more prevalent, easier, and affordable is essential for Pakistan’s growth and for documenting the economy. Let’s ensure policies support a truly digital Pakistan, driving transparency and compliance without undue burdens.”

While the government touts the initiative as a move toward economic transparency, the practical implications of the new taxes are likely to complicate digital operations for businesses and escalate costs for consumers.

The Finance Bill includes:

A 5% tax on foreign e-commerce purchases (e.g., from Amazon and AliExpress), deducted at the point of transaction by banks and payment gateways.
Tiered taxation on local digital transactions, ranging from 1% to 2% based on transaction size.
Mandatory registration of all vendors on digital marketplaces for sales tax compliance.
Designation of banks and courier companies as withholding agents, responsible for tax collection and submission.

Courier companies will also be required to collect taxes on cash-on-delivery (COD) transactions, effectively taxing a system used by over 60% of e-commerce shoppers in Pakistan.

Pakistan’s Digital Tax: Trade Bodies, Tech Sector Raise Red Flags

The Pakistan Software Houses Association (P@SHA), which represents the country’s IT and software export sector, criticized the budget for overlooking the needs of one of Pakistan’s fastest-growing export industries. In a statement, the association warned:

Neglecting key demands from the IT sector and introducing inconsistent tax policies could stall export growth, threaten jobs, and send a negative signal to global investors about Pakistan’s digital ambitions.”

The sector, which generated over $3 billion in exports in the past year, has been a pillar of economic hope amidst Pakistan’s chronic trade imbalances. The lack of incentives, combined with increased taxation, risks driving both talent and investment out of the country, P@SHA emphasized.

The Overseas Investors Chamber of Commerce and Industry (OICCI) echoed this sentiment, noting that while the government had taken some positive steps, such as expanding e-invoicing and point-of-sale systems, it failed to implement a broader vision.

The government missed a crucial opportunity to broaden the tax base and document the country’s vast Rs9 trillion cash-based informal economy. The absence of a concrete strategy to address the informal sector and rationalize tax structures undermines efforts to create a more investment-friendly environment and advance economic formalization.”

-OICCI Press Release

Structural Gaps and Compliance Challenges

One of the most glaring oversights in the budget, according to stakeholders, is the lack of enforcement against retailers that actively avoid digital payments to underreport income. This loophole continues to enable tax evasion and keeps vast portions of the economy undocumented.

“Despite the increasing penetration of mobile wallets and digital banking apps, many major retailers still refuse to accept digital payments,” said a senior official at a fintech startup. “Without mandatory digital acceptance laws and better enforcement, tax evasion will remain rampant, and honest businesses will be punished for compliance.”

Aamir Ibrahim also warned of unintended consequences:

If digital transactions become more expensive or cumbersome, we risk undermining the very progress we’ve made in financial inclusion and digital transformation. We need to strike a balance between expanding the tax net and fostering digital inclusion.

What This Means for Pakistan’s Digital Future

Pakistan has seen significant growth in digital financial services over the past five years, driven by mobile wallet usage, fintech innovation, and regulatory support from the State Bank of Pakistan. The country’s digital payments volume grew by 58% in FY24, according to SBP data, and mobile money account holders now exceed 50 million.

However, the new budget risks stalling this momentum. The added complexity, especially for small businesses and rural consumers, could push many back into cash transactions, reversing the gains made in financial inclusion and transparency.

Policymakers have until the final passage of the budget later this month to address industry concerns. Aamir Ibrahim urged the government to act quickly.

There is still time to fix anomalies in the new budget. Let’s make sure that our policies truly support a digital Pakistan, rather than create new barriers to adoption.”

Balancing Tax Reform with Digital Inclusion

As Pakistan grapples with fiscal deficits and external debt pressures, broadening the tax base is an urgent priority. But the challenge lies in crafting policies that encourage participation in the formal economy without stifling innovation or deterring compliance.

Industry stakeholders are calling for