FOR the first time, the government has the digital economy in its crosshairs. With a slew of new measures proposed in the federal budget for fiscal 2025-26, it intends to start taxing a broad range of e-commerce activity starting July 1, including online shopping, food delivery, digital entertainment and others. The budget documents reveal that for local sellers using e-commerce platforms, a tax ranging from 0.25pc to 2pc of the total amount will be imposed on the sale of all `digitally ordered` goods and services. Additionally, each digital transaction will now incur a 2pc sales tax, and all local sellers will be required to show income tax and sales tax registration before they can be allowed to sell their goods or services online.

Foreign vendors have not been spared either. A new 5pc tax is to be imposed on all payments made to foreign sellers for goods and services supplied to Pakistani buyers. Furthermore, foreign entities that run advertisements on social media or other online platforms to target Pakistani users will be required to pay 5pc of their gross ad spend to the government of Pakistan in tax.

It goes without saying that these measures will take more money out of the pockets of those who engage heavily in e-commerce activity. This would predominantly mean younger Pakistanis, for many of whom online buying, selling and paying for various services is the preferred, even `normal`, way of engaging in commercial activity. The stringent tax registration and compliance requirements laid out in the budget in order to engage in e-commerce activity could also imperil numerous small, home-based and individual-run businesses, many of which depend on various digital platforms to generate a side income, especially as Pakistan has been experiencing a prolonged period of economic turmoil defined by stagnating job earnings and rapidly eroding purchasing power. There is also concern over whether courier companies, which have been burdened with the responsibility of collecting some of these taxes, have the capacity and systems to do so. The strict penalties outlined in case of non-compliance may leave various stakeholders with no choice, but it does seem things could get messy before they settle down.

While it makes sense for the government to regulate e-commerce activity and generate revenue from it, it must adequately address these concerns before proceeding further.