Pakistan’s plan to build a cashless, digital economy faces serious challenges after the government introduced new taxes on digital payments, online shopping, and imports. Business leaders, investors, and trade groups warn that these taxes in the 2025-26 budget could slow digital growth and shake investor confidence.
The Finance Bill proposes measures to bring the online economy into the formal system and widen the tax base. Critics say the rules are too complex and harsh, especially for small businesses and everyday consumers. They fear such rules may do more harm than good for the economy’s digital shift.
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 supported this view. They pointed out that while the government took some positive steps, such as expanding e-invoicing and point-of-sale systems, it lacked a clear long-term plan.
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
A major issue left unaddressed is enforcement. Many retailers still resist digital payments to avoid taxes, allowing significant parts of the economy to hide income. This loophole makes tax evasion easier and keeps a large share of transactions off the books.
A senior fintech official said many big stores still refuse digital payments. Without strict rules requiring digital methods and better enforcement, tax cheats will persist and honest businesses will suffer unfairly.
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
In the last five years, digital financial services have grown strongly, fueled by mobile wallets, fintech innovations, and support from the State Bank of Pakistan. The value of digital payments jumped 58% in FY24. Over 50 million people now hold mobile money accounts.
Yet, the new budget risks slowing this progress. Increased complexity may cause many small firms and rural users to switch back to cash. This could undo gains made in financial inclusion and transparency.
Policymakers have a few weeks to fix industry worries before final approval of the budget. Aamir Ibrahim called on 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
Pakistan faces big fiscal problems, with debts and deficits rising. Expanding the tax base is urgent. Still, policies must let more people join the formal economy without blocking innovation or discouraging compliance.
Industry stakeholders are calling for
- A simplified and uniform digital tax structure
- Incentives for digital payment adoption in retail
- Stronger enforcement against tax evasion in the informal sector
- A long-term roadmap for digitization and economic documentation
Without a thoughtful strategy, Pakistan’s goal to become a digital economy may stay out of reach.
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