ISLAMABAD: Pakistan’s commerce and information technology ministries have announced the formation of a joint working group to propose changes to the country’s e-commerce tax regime, following the introduction of new digital levies in the federal budget for fiscal year 2025–26.

The budget, announced on June 10, imposes a tiered taxation structure on digital transactions. For payments under Rs10,000 ($35), a 1 percent tax will be applied. Payments between Rs10,000 and Rs20,000 ($71) will face a 2 percent tax, while transactions above Rs20,000 will be taxed at 0.25 percent. Courier services will collect the tax for cash-on-delivery orders, and payment gateways will deduct it for online payments. 

The measures have raised concerns among businesses about increased compliance burdens and costs for online consumers.

“In line with the consultative approach of the forthcoming policy, Minister Kamal Khan announced the formation of a joint working group with input from the IT Ministry to gather comprehensive recommendations on taxation, vendor compliance and digital payments,” the commerce ministry said in a statement after a meeting between Commerce Minister Jam Kamal Khan and IT Minister Shaza Fatima Khawaja.

“The group’s findings will be formally presented to the prime minister for final consideration,” it added.

“Minister Kamal also confirmed that e-commerce policy 2.0 is in its final stages of internal review and will soon be submitted for cabinet approval.”

Pakistan’s e-commerce sector has grown rapidly, reaching a market value of Rs2.17 trillion ($7.7 billion) in 2024, according to the ministry of commerce. The sector is expected to expand at a compound annual growth rate of 17 percent through 2027, driven by increased smartphone penetration, digital payments, and logistics infrastructure.

The new tax framework has triggered concern among industry stakeholders, particularly small and medium-sized enterprises (SMEs), which dominate Pakistan’s online retail sector. Analysts say the measures could slow growth and hinder innovation in a sector seen as key to the country’s digital transformation.

In comparison, regional tax regimes vary.

India applies a 1 percent Tax Collected at Source (TCS) on e-commerce sellers under its Goods and Services Tax (GST) framework, while Bangladesh introduced a 5 percent VAT on local digital services in 2022. Sri Lanka levies a 2.5 percent Value Added Tax on online purchases, with additional withholding tax for certain platforms.

Globally, the European Union imposes VAT on cross-border e-commerce transactions, with rates ranging from 17 percent to 27 percent, while US states apply sales taxes ranging between 0 percent and 10.25 percent, depending on jurisdiction.

Pakistan’s e-commerce policy 2.0, once finalized, is expected to address regulatory gaps and streamline the digital business environment, which has so far operated under fragmented taxation and compliance rules.