Govt Plans 5% Digital Services Tax in Upcoming FY2025-26 Budget

The federal government of Pakistan plans to introduce a 5% digital services tax in the upcoming FY2025-26 budget. This move could reshape the country’s digital economy. Sources confirm that the government aims to increase tax revenues by expanding the tax net to include more of the digital sector.

The proposed digital services tax is expected to target online platforms, content creators, app-based businesses, and other digital operators, both domestic and foreign. If approved, this measure could generate up to Rs10 billion in revenue, according to preliminary estimates by the Federal Board of Revenue (FBR).

5% Digital Services Impact on Pakistan’s IT Sector

Pakistan’s IT and digital services sectors have long enjoyed favorable tax regimes to foster growth. Export-registered software companies currently pay a nominal 0.25% final tax on export earnings, while freelancers benefit from a flat 1% tax rate. These incentives have been crucial in helping the IT sector reach an all-time high of $3.5 billion in export revenue, with forecasts pointing to $4 billion by year-end.

Industry stakeholders, however, are expressing concern over the proposed tax. According to the Pakistan Software Houses Association (P@SHA), this new tax could hurt the very sectors driving the country’s digital transformation. P@SHA warns that adding financial burdens could slow investment, push freelancers to informal channels, and reduce Pakistan’s competitiveness in the global digital economy.

A number of freelancers and IT professionals have already voiced opposition on social media and through online petitions. One widely shared petition argued that “taxing digital professionals prematurely will discourage entrepreneurship and push talent abroad.”

Regional Context and Policy Background

Pakistan is not alone in its efforts to tax the digital economy. India introduced a 6% equalization levy on digital ads in 2016 and later expanded it to include e-commerce services. Bangladesh applies a 15% VAT on digital services and recently imposed a 10% withholding tax on freelancer remittances. The global trend is clearly shifting toward taxing digital transactions, especially from foreign tech giants operating in local markets.

However, critics argue that Pakistan’s digital ecosystem is still in its growth phase and should not be burdened prematurely. They recommend maintaining favorable tax policies, improving compliance, and expanding the tax net gradually, without discouraging innovation or export growth.

With budget day approaching, the tech community is anxiously awaiting final decisions. Whether the government proceeds with the digital services tax as proposed could have lasting consequences for Pakistan’s digital future.