Disruption and Distortion in the Tax Regime

The recently implemented tax structure operates as a final tax regime. This implies that transactions previously subject to standard taxation will now face taxation at specified rates, constituting the ultimate tax on these transactions.

This alteration is anticipated to cause considerable disturbance and skewing, potentially reshaping the entire business paradigm as operations transition to the digital sphere.

A commentary on the Finance Act 2025—I indicates that while documentation may improve, the distortion created by the final regime should be gradually phased out as sufficient documentation is established.

Exclusion from New Tax Provisions

The newly introduced regulations will not encompass goods exports (Section 154) and services exports (Section 154A), which will continue to be governed by the existing taxation framework.

Digital Presence Tax for Foreign Entities

General Overview

A novel tax known as the ‘Digital Presence Proceeds Tax Act, 2025’ has been instated for international vendors.

This tax targets earnings of overseas vendors considered attributable to Pakistani users, based on their substantial digital footprint within Pakistan, specifically where:

  • Transactions occur via a foreign online marketplace or e-store;
  • They relate to services and goods ordered digitally; and
  • A Pakistani user participates in the transaction.

This tax is pertinent in instances where digital transactions fall outside the scope of domestic digital transactions mentioned earlier, covering both tangible goods and services.

Tax Rate Details

The applicable tax rate for collecting cross-border transactions involving digitally procured goods and services is specified as follows:

  1. Services: 5% of the total payment, inclusive of advertising on social media platforms.
  2. Goods: 5% of the payment directed to the foreign provider.

This tax essentially targets transactions executed via platforms like ‘Amazon’ and ‘Google’.

Context and Background

The implemented tax mirrors a similar levy in India. The prevailing situation in India is outlined below:

India’s Finance Minister Nirmala Sitharaman revealed modifications to the 2025 Finance Bill in the parliament’s lower chamber, which sanctioned the tax proposals within the budget.

She stated her proposal to eliminate the 6 percent equalization levy on advertisements.

India’s 6 percent equalization levy, or digital tax, impacts online advertising services rendered by foreign entities, mandating them to withhold and remit the tax to the government.

Last year, New Delhi rescinded a 2 percent levy on non-resident e-commerce firms offering online services.

This taxation has encountered substantial opposition from international corporations, notably those based in the USA.

Special Presence Considerations in Pakistan

The tax is imposed on services not ordinarily taxable under the conventional regime, as such digital presence is not deemed a permanent establishment in Pakistan. Even if it were, the activity might not be considered attributable to Pakistan.

To address this shortfall, this specific legislation introduces a distinct definition of digital presence, as outlined in the Act:

Significant Digital Presence in Pakistan

A foreign vendor is considered to have a significant digital presence in Pakistan under this Act if they supply digitally ordered services and goods from outside Pakistan to any user within Pakistan, provided the aggregate amount surpasses one million rupees in a fiscal year, along with any of the following:

  • Existence of a user base and related data input;
  • Billing or collection in local currency or via a local payment method;
  • Accountability for the final delivery of goods and services to Pakistani consumers;
  • Responsibility by foreign vendors for providing additional support services (after-sales, repairs, and maintenance); and
  • Ongoing marketing and sales activities, online or offline, to attract customers.
Tax Collection and Payment Modalities

Every payment intermediary, including banking firms, financial institutions, licensed exchange companies, or payment gateways responsible for disbursing payments (in whole or part) outside Pakistan to a foreign vendor for digitally ordered services or goods, must deduct tax from the total amount paid.

Definitions Related to Digital Tax for Foreigners

Definitions provided for clarity:

  • Digitally Delivered Services: Services delivered via the internet or electronic networks, automated with minimal human intervention. Examples include music/video streaming, cloud services, online software, telemedicine, e-learning, online banking, architectural design, research reports, accounting files, or other online facilities.
  • E-commerce: Sale or purchase of goods/services over computer networks, designed for order placement via websites, mobile apps, or online marketplaces with digital ordering features using mobile phones or automated computer systems.
  • E-store: Online platforms including websites/apps used for e-commerce, involving buying/selling goods/services (including digital products) through electronic transactions over the internet.
  • Online Marketplace: Online interfaces facilitating direct interaction between buyers and sellers for digital orders of goods/services, without the platform owning the goods or rendering the services.
  • Payment Intermediary: Third-party entities (banks, financial institutions, exchange companies, payment gateways) that facilitate fund transfers or payment instructions between parties, enabling/processing payments without being the ultimate source/recipient.
Embargo/Restriction on Economic Transactions

The Finance Act, 2025 imposes, for the first time, restrictions on specific economic transactions, encompassing:

  1. Transactions related to asset acquisition;
  2. Transactions related to bank account withdrawals.

(To be continued)

Copyright Business Recorder, 2025