KARACHI: Pakistan’s imposition of new taxes on international e-commerce giants such as Temu, Shein, and AliExpress is drawing relief from local retailers, who say the foreign firms have been operating in the country without paying taxes, thus undercutting domestic businesses.

The new measures, introduced through the federal budget passed on June 26, include an 18% sales tax on goods delivered by courier companies on behalf of foreign platforms, a 5 percent fixed income tax on digital retailers, and a reduction in the duty-free threshold for imported parcels from Rs5,000 to Rs500 ($18 to $1.80).

The tax regime took effect on July 1.

“This is a very welcome move by the government to have brought the international platforms into the tax net,” Malik Asim Dogar, secretary-general of the Chainstore Association of Pakistan (CAP), told Arab News.

The policy, he said, would ease the burden on domestic retailers, prevent inflows of “inexpensive but substandard” goods, and help Pakistan’s cash-strapped government raise tax revenue.

Prime Minister Shehbaz Sharif’s administration has pledged to collect over Rs14 trillion ($49.3 billion) in taxes this fiscal year, partly to meet targets under a $7 billion loan program with the International Monetary Fund.

Until now, foreign e-commerce platforms had been selling directly to Pakistani consumers, often via social media, without being subject to local tax laws. Formal retail chains in Karachi such as Imtiaz, Chase Up, and Naheed — already paying up to 25% in taxes — said they had struggled to compete with tax-exempt imports offering cheaper prices.

A Temu representative did not respond to questions, while Shein and AliExpress could not be reached. Pakistani courier giant TCS also did not reply to questions about delivery volumes from foreign e-commerce sellers.

CAP estimates Pakistan’s retail sector includes about 5 million shops, generating Rs20 trillion ($70.5 billion) annually, of which only 10% comes from the tax-compliant formal sector.

Daily parcel volumes from foreign platforms have surged from around 1,000 per day in 2023 to between 20,000 and 30,000 this year — a rise of nearly 2,900%, according to internal figures from local courier companies shared by CAP.

“What we have seen is that on a daily basis, tens of thousands of shipments are coming into the country,” CAP chairman Asfandyar Farrukh said. “People order online on these platforms through social media or other websites. All these products are coming into Pakistan.”

Farrukh said the most affected segments include domestic sellers of crockery, home goods, small electronics, and casual clothing, who had reported sales declines of up to 10% in the past six months.

CAP’s Dogar said the lack of regulation previously created an “unfair playing field” for local retailers.

But Shankar Talreja, head of research at brokerage firm Topline Securities, said the new taxes would address a long-standing complaint of local retailers.

“This was an unfair advantage to the importers,” Talreja told Arab News. “Now that a certain percentage of tax is applied to the products sold by foreign vendors, the domestic sellers will get some level-playing field.”

Talreja noted Pakistan’s growing Internet penetration — with over 80% teledensity — was already fueling e-commerce, even if it still accounts for less than 1% of the overall retail market.

Retailers themselves are shifting to digital platforms, albeit reluctantly.

“Nowadays, we are seeing that most of the footfall on digital platforms and online shopping is of those who are young in age and more savvy digitally,” said Salman Bashir, CEO of Chase Up, one of Pakistan’s largest retail chains.

“We as well as the whole retail sector will have to bring this change into their companies.”

However, Bashir expressed skepticism about whether the new tax measures would be properly enforced.

“These [taxes] haven’t been implemented even if they stand passed,” he said, speaking two days after the budget became law on July 2.

Dogar and Talreja echoed his concerns, pointing to implementation hurdles in assigning tax collection duties to banks and courier companies.

Under the new rules, financial institutions are required to withhold a portion of remittances made to foreign sellers. Courier firms are also expected to collect sales tax at the point of delivery — a move some say is burdensome and unrealistic.

“The responsibility to collect these taxes has been put on courier companies, which would very much affect their business operations,” Dogar said.

Talreja warned that enforcement could falter without better coordination.

“The courier companies often do not have visibility into whether the seller is registered as a local or foreign. Couriers are logistics firms, not tax collection agents by design,” he said.

“This will increase their administrative work, hence the motivation to work in this aspect would be lower.”