Taxation of Digital Businesses in Pakistan

With the rapid growth of e-commerce, online services, and digital platforms, the taxation of digital businesses in Pakistan has become a critical policy area. From freelancers and e-commerce sellers to online marketplaces, software-as-a-service (SaaS) providers, and content creators, digital businesses now make up a significant part of the economy. Recognizing this trend, the Federal Board of Revenue (FBR) has introduced specific rules and tax obligations under the Income Tax Ordinance, 2001 and Sales Tax Act, 1990 to regulate and bring digital income into the tax net. This article explores the detailed taxation framework applicable to digital businesses operating in or from Pakistan.

Who Qualifies as a Digital Business?
A digital business typically includes any commercial activity carried out over the internet or digital platforms. These may include:

• Freelancers providing services through platforms like Fiverr, Upwork, Freelancer

• E-commerce sellers on Daraz, Amazon, Shopify

• Software developers, SaaS companies, and mobile app publishers

• Digital marketing agencies and SEO consultants

• Bloggers, vloggers, YouTubers, and content creators

• Online educators and course sellers (e.g., Udemy, Teachable)

• Influencers generating income via affiliate links, ads, and sponsorships

• Dropshipping and print-on-demand businesses

Whether the business earns income from domestic or foreign clients, it may be taxable in Pakistan depending on the residency status and source of income.

Legal Framework for Taxing Digital Businesses
Taxation of digital businesses in Pakistan is governed by:

• Income Tax Ordinance, 2001

• Sales Tax Act, 1990

• Income Tax Rules, 2002

• FBR SROs and Circulars

• Pakistan Telecommunication (Re-organization) Act, 1996 (for digital services)

• Finance Act (updated annually)

Tax obligations apply to both resident persons and non-resident digital service providers offering services to Pakistan-based consumers.

Income Tax for Digital Businesses in Pakistan

1. Resident Digital Businesses:
A person is considered resident in Pakistan if:

• An individual is present in Pakistan for 183 days or more during the tax year

• A company or firm is incorporated or managed from Pakistan

Taxability:

• All global income is taxable under the resident status

• Income from foreign clients (freelancing, SaaS, consulting) is taxed under Section 11

• Incomes are categorized as:

  • Income from business or profession (Section 18)

  • Income from other sources (Section 39)

  • Capital gains (Section 37)

Applicable Tax Rates (FY 2025):

• Sole Proprietors/Freelancers: Progressive slab rates (2.5% to 35%)

• Companies (Pvt Ltd): 29%

• Small Companies (Section 2(59A)): 20% if eligible

2. Non-Resident Digital Businesses (NRPs):
A non-resident business earning income from Pakistan is taxed on Pakistan-source income under Section 101.

FBR introduced Digital Services Tax in 2021 for:

• Social media platforms

• Online marketplaces

• SaaS companies with Pakistani clients

NRPs may be subject to:

• Withholding tax under Section 152

• 15% tax on royalty or fee for technical services

• Sales tax on services under Sales Tax on Services Acts (provincial)

Minimum Tax under Section 113
Minimum tax is applicable to digital businesses even if they incur losses or pay zero normal tax:

• 1.25% of annual turnover for companies and sole proprietors

• Applicable only if declared profit is lower than minimum threshold

Tax Credits and Deductions for Digital Businesses
Digital entrepreneurs can claim the following deductions:

• Internet and software subscription costs

• Hosting and domain registration

• Salaries and outsourced services

• Office rent and utilities

• Advertising and marketing

• Laptops, equipment, depreciation

• Payment gateway fees and transaction charges

Freelancers can also claim:

• Foreign travel for client meetings

• Educational courses related to skill development

All expenses must be business-related, documented, and paid through banking channels to be deductible.

Sales Tax on Digital Services

1. Sales Tax for Residents:

• If registered under Sales Tax Act, digital businesses must:

  • File monthly sales tax return

  • Charge 17% GST (for goods) or 13% to 16% provincial sales tax (for services)

• Software development, SEO, online marketing, and IT services are taxable under Sindh Revenue Board (SRB), Punjab Revenue Authority (PRA), and KPRA

2. Sales Tax for Non-Residents:

• Foreign service providers offering digital services to users in Pakistan (e.g., Facebook, Google Ads, Zoom) are subject to Sales Tax on Services

• Some foreign firms have voluntarily registered with SRB/PRA and charge GST on B2B transactions

Thresholds:

• Freelancers and small businesses may stay exempt if their annual turnover is below Rs. 3 million

• However, they lose input tax claim benefits and taxpayer advantages

Taxation of E-Commerce Businesses

1. Amazon Sellers and Dropshippers:

• Income from Amazon (FBA/FBM), Etsy, Shopify is taxable as foreign business income

• Must file returns in Pakistan and pay business tax or minimum tax

2. Daraz and Local E-Commerce:

• Sellers must be FBR registered

• Daraz deducts withholding tax before payment

• Sales tax is charged on each order

3. Platforms Like Foodpanda, Bykea:

• Classified as marketplace operators

• Required to deduct and deposit tax from vendors/sellers

• Vendors must be registered with FBR and PRA/SRB

Tax Filing Requirements for Digital Entrepreneurs

1. Registration:

• Obtain NTN (National Tax Number) from FBR

• Register as:

  • Individual (freelancer/sole proprietor)

  • AOP or company (for agencies/startups)

2. Return Filing:

• Annual income tax return (due September 30 for individuals)

• Monthly withholding tax statements (if applicable)

• Monthly sales tax returns (if registered)

3. Wealth Statement:

• Mandatory if income exceeds Rs. 1 million

• Must declare foreign income, assets, and accounts

Withholding Tax Obligations

Digital businesses making payments must deduct withholding tax if they:

• Hire consultants, designers, or marketers

• Rent office premises

• Pay salaries (Section 149)

• Hire contractors (Section 153)

Withholding tax must be:

• Deducted at source

• Deposited by 15th of next month

• Reported via monthly statements (Form 45)

Digital Payment Gateways and Banking Compliance

1. Payoneer and Wise (TransferWise):

• Income received via these platforms is considered foreign-sourced

• Must be reported in income tax returns

• Banks may demand FIRC (Foreign Inward Remittance Certificate)

2. Local Payment Integrations:

• Businesses using JazzCash, EasyPaisa, HBL Konnect must:

  • Maintain transaction records

  • Reconcile sales with deposits

Export Incentives and IT Sector Relief

1. Zero-Rating for IT Exports:

• Registered IT exporters may qualify for:

  • Zero-rated sales tax

  • Tax credit under Section 65F

  • Exemption on export income (up to 80%) if registered with PSEB

2. PSEB and SECP Registration:

• Exporters of software and IT services can register with Pakistan Software Export Board

• Helps qualify for tax rebates, foreign exchange retention, and SBP approval

Penalties for Non-Compliance

Audit Risk and Digital Footprint

FBR now uses data from:

• NADRA, banks, Payoneer, social media ads

• Property records, mobile wallets

• Online marketplace transactions

Digital businesses are at risk of audit if:

• Income is unreported

• Lifestyle and declared income don’t match

• Payments from foreign platforms are not filed

FAQs on Taxation of Digital Businesses

Q. Is income from Fiverr or Upwork taxable in Pakistan?
A. Yes. If you are a resident, global freelancing income is taxable under business or other sources.

Q. Do I need to register for sales tax if I offer SEO or design services?
A. Yes, if annual revenue exceeds Rs. 3 million and you’re providing services within Pakistan.

Q. Are Amazon sellers required to pay tax in Pakistan?
A. Yes, Amazon sellers (FBA or FBM) must declare and pay tax on their earnings.

Q. What tax do non-resident companies like Facebook or Google pay?
A. Non-residents are taxed on Pakistan-source digital income, mainly through withholding and sales tax on services.

Q. Do I need to file tax returns if I only receive Payoneer payments?
A. Yes. Foreign income must be declared, and you must file an annual return with FBR.

Conclusion
The taxation of digital businesses in Pakistan is evolving rapidly to match the digital transformation of the economy. Whether you are a freelancer, e-commerce store owner, SaaS provider, or digital content creator, understanding your tax obligations is essential to ensure compliance, avoid penalties, and access incentives. From income tax and sales tax registration to recordkeeping, withholding, and export exemptions, digital entrepreneurs must navigate a comprehensive legal framework. With growing enforcement and integration of digital records, now is the time for all online businesses to formalize their operations and fulfill their tax duties.