Pakistan’s ambition to become a cashless and digitally integrated economy is facing significant setbacks following the introduction of new digital taxes in the 2025–26 federal budget. These taxes target online payments, e-commerce transactions, and foreign purchases, prompting concern from tech leaders, investors, and trade bodies who warn that the policy shift could derail digital growth and shake investor confidence.

The Finance Bill 2025–26 includes several measures aimed at formalizing the online economy and broadening the tax base. However, critics argue that the proposed structure is overly burdensome—particularly for small businesses and consumers—and may counteract its intended goals.

Concerns from Industry Stakeholders
Telecom Operators Association of Pakistan (TOAP) Chairman Aamir Ibrahim voiced mixed reactions, supporting the effort to formalize online trade but warning against the rising complexity and cost of digital transactions. He pointed to issues such as the 5% tax on foreign vendor transactions and additional fees by payment intermediaries, noting these could discourage digital payment adoption.

READ MORE:

Govt Slashes 5G License Revenue Target, Shifts Burden to Mobile Users

The proposed measures include:

• A 5% tax on foreign e-commerce purchases (e.g., Amazon, AliExpress), collected at the point of sale by banks and payment processors.

• Tiered taxation on local digital payments (1% to 2%, based on amount).

• Mandatory registration of all online sellers for sales tax compliance.

• Banks and courier services acting as withholding agents for tax collection.

• Taxes on Cash-on-Delivery (COD) transactions—still the preferred method for over 60% of e-commerce customers.

Pushback from the Tech Sector
The Pakistan Software Houses Association (P@SHA) criticized the Finance Bill for overlooking the IT industry’s priorities. With the sector generating over $3 billion in exports last year, P@SHA warned that increasing the tax burden could hurt job creation, slow export growth, and drive away investors and talent.

The Overseas Investors Chamber of Commerce and Industry (OICCI) echoed these concerns, pointing out the government missed an opportunity to document the Rs. 9 trillion informal economy. They noted that the lack of tax rationalization and a clear digital roadmap weakens investor confidence.

Compliance Gaps and Enforcement Issues
Stakeholders also raised red flags over enforcement weaknesses. Many large retailers still refuse digital payments to underreport income, despite widespread mobile wallet and banking app usage. A fintech executive stressed that without mandatory digital acceptance and stricter oversight, tax evasion will continue to flourish.

Aamir Ibrahim warned that rising costs and complexity in digital payments could undo hard-earned gains in financial inclusion and tech-driven growth.

The Risk to Pakistan’s Digital Momentum
Pakistan has made significant strides in digital finance over the last five years, with a 58% growth in digital payment volume in FY24 and over 50 million mobile wallet users. However, the new taxation model could reverse these gains, especially for rural users and small vendors who may revert to cash dealings.

Policymakers have until the budget’s final approval to make adjustments. Ibrahim urged the government to resolve policy gaps and promote inclusive digitization.

Path Forward: Reform Without Regression
To align taxation with digital growth, industry leaders are urging:

• A simplified and unified digital tax policy

• Incentives for retailers to adopt digital payments

• Robust enforcement against informal sector tax evasion

• A long-term roadmap to digitize and document the economy

Without these reforms, Pakistan risks undermining its digital transformation goals and losing the economic benefits of a formalized, tech-driven ecosystem.