No More 5% Tax: FBR eases rules on foreign digital supplies

In a move that caught many by surprise, the Federal Board of Revenue (FBR) has officially suspended the 5% Digital Presence Proceeds Tax on foreign-supplied digital goods and services, effective July 1, 2025.

Through notification S.R.O. 1366(I)/2025, the FBR announced that “digitally ordered goods and services supplied from outside Pakistan” will no longer be subject to the 5% levy previously introduced under the Digital Presence Proceeds Tax Act, 2025.

Why Was the Tax Introduced?

The tax, introduced in the June federal budget, aimed to bring foreign e-commerce vendors and global tech platforms into Pakistan’s tax net. Specifically, it targeted companies with a “significant digital presence” in the country—even if they didn’t have a physical office here. This policy mirrored digital service taxes (DSTs) rolled out across Europe, designed to collect revenue from offshore companies earning money from local users.

Under the now-suspended system, banks and payment processors were expected to withhold 5% from cross-border payments. Additionally, customs officials had instructions to block deliveries of parcels unless proof of tax payment was provided.

What Does the Exemption Cover?

The new notification makes it clear: starting July 1, 2025, no foreign-supplied digital goods or services will be taxed under the Digital Presence Proceeds Tax Act, even if they would have qualified for taxation earlier. This includes:

• Subscriptions to international streaming and gaming platforms.
• Cloud computing and software-as-a-service (SaaS) products.
• Physical and digital goods purchased from overseas e-commerce stores.

This decision comes as welcome news for small startups and digital entrepreneurs, who had warned that the 5% tax would raise their operating costs and slow their growth. Consumers, too, had been bracing for higher prices on everything from online courses to imported gadgets.

“Removing this tax keeps Pakistan competitive,” said Mr. Usman, founder of a Lahore-based cloud services startup. “We need affordable access to global platforms if we’re serious about scaling businesses and generating jobs.”

What’s Next?

With the tax officially suspended, foreign-supplied digital services remain exempt from additional charges—at least for now. The FBR, however, is expected to continue monitoring the situation. In the months leading up to this reversal, officials indicated plans to:

• Strengthen real-time monitoring of international payments
• Collaborate with both local and international business communities

As Pakistan’s digital economy grows rapidly, the government faces a tough balancing act: increasing revenue without stifling innovation or making essential digital tools unaffordable.

The coming months may shape how Pakistan chooses to tax the digital space—if at all.

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