KARACHI: A senior Pakistani finance official said on Friday the government had decided to roll back a recently imposed digital tax on foreign retailers in an effort to promote e-commerce in the country.

The Federal Board of Revenue (FBR), the government’s tax collection body, reversed this week a set of measures introduced in the federal budget that were aimed at regulating cross-border online purchases and affected international firms like China’s Temu, Shein and AliExpress.

These included a five percent fixed tax on digital platforms and a sharp reduction in the duty-free threshold for imported parcels, slashing it from Rs5,000 ($18) to Rs500 ($1.8).

“The government plans to continue expanding the e-commerce sector by keeping the market open to international players,” Finance Adviser Khurram Schehzad told Arab News.

The move has sparked backlash from local retailers, who argue that the policy puts them at a disadvantage.

“The removal of the five percent levy on foreign goods is likely to negatively affect domestic sellers, including small businesses and established retailers,” Asfandyar Farrukh, Chairman of the Chainstore Association of Pakistan (CAP), said.

According to CAP, foreign platforms, primarily those belonging to China, are sending as many as 30,000 parcels daily to Pakistani consumers, up from just 1,000 two years ago. Internal courier company data shared by CAP shows this as a nearly 2,900 percent surge in parcel volumes.

Farrukh also questioned the timing and motivation behind the policy reversal, linking it to Pakistan’s recent trade negotiations with the United States.

“The government’s decision to withdraw the digital proceeds levy appears to have been heavily influenced by the US trade deal,” he said, pointing out that American tech giants such as Google and Meta were also affected by the tax and are now exempt.

“The five percent levy should have been maintained on foreign goods, even if removed for services, where it arguably didn’t apply.”

Still, Farrukh acknowledged parallel budgetary measures, such as the reduction in the duty-free threshold and stricter customs enforcement, may temper some of the impact.

“Authorities are now more vigilant in ensuring that foreign e-commerce goods aren’t under-invoiced to evade taxes at import,” he added.

Economist Shankar Talreja echoed some of these concerns.

“This tax withdrawal encourages the use of imported products at the cost of domestic manufacturing,” he said. “It promotes a trading culture rather than production.”

Talreja, who heads research at Karachi-based Topline Securities, added the domestic industry is losing competitiveness as local products are taxed through sales and income levies, while foreign goods bypass the same regulatory burden.

He agreed with the CAP chairman about the circumstances of the tax withdrawal.

“The government, according to reports, reversed the tax under pressure from trade talks with the US,” he said.

Pakistan’s retail sector includes about five million shops generating an estimated Rs20 trillion ($71 billion) annually, but only 10 percent of this comes from the tax-compliant formal sector that CAP represents.

Temu did not respond to Arab News’s request for comment. Shein and AliExpress could not immediately be reached.