E-commerce Sector Grapples with Increased Costs Due to New Taxes

Pakistan’s e-commerce sector is facing a surge in operational expenses following the implementation of new taxes on courier services, as stipulated in the Finance Act 2025. Industry insiders revealed this development on Wednesday.

A key concern for the sector is the heightened logistics costs, primarily driven by a 2% withholding tax and a 2% sales tax on Cash on Delivery (COD) transactions. Stakeholders noted that courier companies have started deducting these taxes from online vendors to adhere to the latest regulations outlined in the federal budget. The Federal Board of Revenue (FBR) has designated these companies as collection agents due to their role in holding sellers’ invoices and acting as intermediaries.

The Finance Bill mandates that courier services are now responsible for the collection and remittance of applicable taxes on behalf of e-commerce sellers.

Omer Mubeen, President of the Pakistan E-commerce Association (PEA), cautioned that these new fiscal measures could erode profit margins and create an additional burden for consumers. He highlighted that online retailers often reduce their margins to provide discounts and free delivery to attract buyers.

While larger e-commerce platforms may have the capacity to absorb these increased costs internally, small and medium-sized enterprises (SMEs) are likely to pass on the financial impact to consumers to sustain their operations.

“The escalating tax burden, combined with rising fuel costs and utility charges, particularly electricity, gas, and internet, is further compressing the already tight profit margins for online businesses in Pakistan,” Mubeen stated.

Mubeen appealed to the government to grant sellers a grace period to register with tax authorities. He also suggested waiving the 2% withholding tax for registered merchants and introducing a minimal 0.25% income tax for compliant sellers to ease their financial strain and encourage documentation and digitization.

Courier firms have also begun advising e-commerce businesses and individual sellers to complete their tax registration to continue using delivery services. Without proper registration, these companies and online marketplaces will be unable to process or dispatch orders.

However, individuals engaged in one-time sales and women operating businesses from their residences will be exempt from mandatory registration under the updated e-commerce tax regulations.

Usman Akhtar, an e-commerce entrepreneur based in Lahore, voiced concerns about the new taxes, noting that many emerging online sellers, including students and young professionals, have invested considerable time and resources to develop viable businesses. He described the new taxes as “discouraging” for these budding entrepreneurs.

“These young sellers are now compelled to bear additional tax expenses and navigate a complicated registration process, which may be unfeasible for many,” he said.

Akhtar pointed out that while other nations incentivize e-commerce and digital sectors through tax breaks and supportive policies to stimulate entrepreneurship and job creation, Pakistan’s focus on short-term revenue could jeopardize long-term growth.

He urged the government to independently evaluate the growth trends of e-commerce in Pakistan and reconsider its decision to levy taxes on online businesses across the country, at least for the next five years.

Online retailers often reduce their profit margins to offer discounts and free delivery to attract customers, but now face limited options to sustain their businesses compared to brick-and-mortar stores, which are not subject to these taxes.

Estimates indicate that Pakistan’s e-commerce sector has expanded by over 35% annually in the last five years. Currently, over 100,000 micro and small online sellers are active, supporting the incomes of more than one million people nationwide. The Cash on Delivery model accounts for over 90% of e-commerce transactions in Pakistan. The country’s total market size is estimated at Rs2.2 trillion ($7.7 billion), which is less than 2% of the national GDP and lags behind regional counterparts.