Islamabad, June 22, 2025 – The National Assembly Standing Committee on Finance and Revenue has formally endorsed the Digital Presence Proceeds Tax Act, 2025, a landmark legislation designed to tax proceeds generated from digital economic activities in Pakistan by non-resident entities. The new law, which is part of the Finance Bill 2025, is expected to come into force on July 1, 2025, pending final approval by the National Assembly.
The committee gave its nod after extensive deliberations, proposing minor amendments and recommending its passage. This Act signifies Pakistan’s move to realign its tax policy with the evolving global digital economy, ensuring that foreign digital vendors contribute their fair share of tax from proceeds earned through users based in Pakistan.
Objective of the Digital Presence Proceeds Tax Act, 2025
The Digital Presence Proceeds Tax Act is Pakistan’s answer to the growing challenge of taxing digital businesses that earn substantial proceeds from users within the country without maintaining any physical presence. Traditional tax frameworks largely rely on the concept of “permanent establishment,” making it difficult to tax these foreign entities.
The Act aims to:
• Establish tax equity between traditional and digital business models.
• Prevent erosion of the country’s tax base due to cross-border digital transactions.
• Reflect the economic reality that value is increasingly generated through user engagement, data collection, and digital infrastructure—often in jurisdictions where companies have no offices or employees.
Scope and Applicability
The Act imposes a 5% tax on gross proceeds from digital transactions executed with Pakistani users by foreign vendors with a significant digital presence. These proceeds include payments made for digitally ordered goods and services delivered from outside Pakistan.
A Pakistani user may be an individual resident, a company incorporated in Pakistan, or a local entity that initiates or receives payments electronically. However, the tax does not apply to:
• Digitally ordered goods and services linked to a permanent establishment within Pakistan.
• Services or goods physically delivered or rendered from within Pakistan.
Criteria for Significant Digital Presence
A foreign vendor is considered to have a significant digital presence in Pakistan if they execute more than five transactions annually and fulfill one or more of the following:
• Accept payments in Pakistani rupees.
• Target users in Pakistan via online marketing.
• Collect data from users based in Pakistan.
• Offer customer support or delivery logistics within Pakistan.
• Maintain long-term promotional activity targeting the domestic market.
This broad definition allows the government to link tax obligations to digital engagement rather than physical presence, ensuring taxation aligns with where value is created.
Collection and Compliance Mechanism
Recognizing the enforcement challenges in taxing foreign entities, the law smartly places the burden of tax collection on domestic financial intermediaries, including:
• Banks
• Licensed exchange companies
• Payment gateways
• Other financial institutions processing cross-border remittances
These entities are responsible for deducting the tax at the source of payment and depositing it with the government treasury by the 7th day of the following month. Furthermore, customs officials will be directed to withhold courier deliveries unless tax payment evidence is provided. However, they are exempt from collecting additional income or sales tax if the digital proceeds tax has already been paid.
Advertisement-Specific Provisions
Foreign vendors that remit payments to online platforms (including social media networks) for advertisements targeting Pakistani users are also covered. These vendors must deduct and deposit the 5% tax on gross proceeds related to such ad expenditures.
Both the vendor and any involved payment intermediary are jointly responsible for depositing this tax by the 7th of the subsequent month. This ensures digital advertisement proceeds also fall within the tax net.
Failure to Comply
Non-compliance triggers a series of stringent measures:
• Personal liability for unpaid tax is imposed on both intermediaries and vendors.
• A surcharge of KIBOR + 3% per annum is applied on the outstanding amount.
• Penalties include up to Rs. 1 million per violation, particularly for failure to file required statements or withhold tax.
• Importantly, intermediaries may be instructed to block remittances to non-compliant advertisers after 120 days of continuous default.
However, due process is mandated, including opportunities to be heard and the right to appeal.
Reporting and Transparency
A robust reporting framework is introduced:
• Quarterly reports must be submitted by banks, payment processors, and social media platforms.
• These reports should detail all relevant proceeds, counterparties, and deductions.
• This level of transparency allows the Federal Board of Revenue (FBR) to track digital revenues effectively and limit tax evasion.
Appeals, Regulation & Rule-Making
Disputes can be appealed to the Appellate Tribunal Inland Revenue (ATIR) within 30 days, with further appeals to the High Court within 60 days on legal grounds.
The FBR is empowered to:
• Develop implementing rules.
• Clarify procedural concerns.
• Amend related provisions of the Income Tax Ordinance, 2001 and Sales Tax Act to streamline the law.
Challenges and Legal Ambiguities
Despite its broad reach, the Digital Presence Proceeds Tax Act raises significant legal and practical questions:
• Double Taxation Treaties: There is ambiguity on whether the digital tax is covered under treaties that shield foreign vendors from income tax in the absence of a permanent establishment.
• International Norms: The tax on tangible goods sold offshore by non-resident suppliers may clash with global tax standards, particularly when no local establishment exists.
• Business Environment: Empowering tax authorities to block remittances could signal an unfriendly business climate, potentially discouraging foreign investment.
Conclusion
The Digital Presence Proceeds Tax Act, 2025 represents a bold step by Pakistan to tax the growing digital economy and capture revenue from foreign vendors who earn significant proceeds from local users without paying taxes. While its goal to close tax loopholes is commendable, its execution must be balanced with global practices, treaty obligations, and economic diplomacy. With the digital economy set to grow rapidly, a fair and transparent taxation framework will be vital for long-term fiscal sustainability.