Disruption and distortion
The tax regime introduced is a final tax regime. This means that such transactions which were earlier subject to normal tax are now going to be taxed at the aforesaid rates which will be final tax on such transactions.
This change will create a big disruption and distortion and the whole business model may change if the business is switched to digital mode.
A comment on Finance Act 2025—I
This will improve documentation; however the final regime, which is creating distortion, is to be rolled back, over the time, when there is adequate documentation.
Exclusion
These new provisions will not apply to exports of goods (Section 154) and export of services (Section 154A), which will continue to be taxed under the present regime.
Digital Presence Tax for Foreigners
General
For foreigners a new kind of tax under the name ‘Digital Presence Proceeds Tax Act, 2025’ has been introduced.
This is a tax on proceeds of foreign vendors as are deemed to be attributable to Pakistani users based on their significant digital presence in Pakistan where:
(i) The transaction is carried out through foreign online marketplace or e-store;
(ii) They arise in connection with digitally ordered services and goods; and
(iii) A Pakistani user is a party to the transaction.
This tax applies to those cases where digital transactions are not covered under domestic digital transactions as referred above. This includes both goods and services.
Rate
The tax rate for collection for cross-border transactions of digitally ordered goods and services shall be as under.
a. Services @ 5% of the payment including of advertisement on social media platforms
b. Goods 5% of the payment made to foreign provider
This tax therefore effectively relates to transactions undertaken by platforms like ‘Amazon’, ‘Google’ etc.
Background and perspective
The tax as imposed is a replica of the tax imposed in India. The present status in India is indicated below:
The Indian Finance Minister Nirmala Sitharaman unveiled the change while introducing amendments to the 2025 Finance Bill in the lower house of parliament, which approved the tax measures in the budget.
“(I) have proposed to remove (the) 6 percent equalisation levy for advertisements,” she told parliament.
India’s 6 percent equalisation levy, or digital tax, affects online advertising services provided by foreign companies, requiring them to withhold and remit the tax to the government.
Last year, New Delhi abolished a levy of 2 percent on non-resident e-commerce firms for providing online services.
This means that this taxation has been very strongly resisted by international companies, especially those in the USA.
Special kind of presence in Pakistan
This tax is levied on such services which are otherwise not taxable under normal regime as such digital presence is not treated as permanent establishment in Pakistan and even if it is so the activity is not considered to be attributable to Pakistan.
In order to overcome that deficiency this specific law is introduced with a particular definition of digital presence which has been defined in the Act as under:
Significant digital presence in Pakistan. – A foreign vendor shall have significant digital presence in Pakistan under this Act, where the foreign vendor supplies digitally ordered services and goods from outside Pakistan to any user in Pakistan, if the aggregate amount exceeds one million rupees in a financial year along with one of the following additional factors –
(a) Existence of a user base and the associated data input;
(b) Billing or collection in local currency or with a local form of payment;
(c) Responsibility for the final delivery of goods and services to Pakistani consumers;
(d) Responsibility for the provision by the foreign vendors of other support services (aftersales services, repairs and maintenance); and
(d) Continued marketing and sales promotion activities, online or not, to attract customers.
Collection and Payment of Tax
Every payment intermediary including a banking company, financial institution, licensed exchange company or payment gateway responsible for making a payment in whole or part remitting outside Pakistan, to a foreign vendor for digitally ordered services or goods shall deduct tax from the gross amount paid.
Definitions-Digital Tax for Foreigners
“digitally delivered services” means any service delivered over the internet or electronic networks, where the delivery is automated and required minimal or no human intervention including music, audio and video streaming services, cloud services, online software application services, services delivered through online inter-personal interaction i.e. tele-medicine, e-learning etc., online banking services, architectural design services, research and consultancy reports, accounting services in the form of digital files or any other online facility;
(d) “e-commerce” means sale or purchase of goods and services conducted over computer networks by methods specifically designed for the purpose of receiving or placing of orders either through websites, mobile applications or online marketplace having digital ordering features by using either mobile phones or automated computer-to-computer ordering system;
(e) “e-store” means the online platform including websites and software applications used to conduct e-commerce, which involves buying and selling goods or services including digital products, through electronic transactions over the internet or other computer networks;
(f) “online marketplace” means Online interfaces that facilitate, for a fee, the direct interaction between multiple buyers and multiple sellers for digital orders for supply of goods and services, without the platform taking economic ownership of the goods or rendering the services that are being sold; and
(g) “payment Intermediary” means any third part entity including a banking company, financial institution, a licensed foreign exchange company or payments gateway that facilitate the transfer of funds or payment instructions between two or more parties to enable, process, route or settle payments in a financial transaction, without being the ultimate source or recipient of the payment.
Embargo/restriction on economic transactions
The Finance Act, 2025 has for the first time laid down embargo/restrictions on certain economic transactions. Two kinds of transactions have been included:
a. Those relating to acquisition of assets etc;
b. Those relating to withdrawal from a bank account.
(To be continued)
Copyright Business Recorder, 2025
