In a key policy shift to facilitate progress on a trade agreement with the United States, Pakistan has withdrawn the recently introduced 5% tax on digitally ordered goods and services supplied by foreign tech firms. The exemption, formally notified by FBR on Wednesday, removes the tax that had been introduced just a month earlier under the Digital Presence Proceeds Tax Act, 2025. While the decision was prompted by demands raised by the US administration, the exemption will benefit all foreign companies operating in Pakistan’s digital economy.
This move coincided with Finance Minister Muhammad Aurangzeb’s visit to Washington, where he engaged in high-level trade discussions with US officials. A senior FBR official confirmed that the waiver is not limited to US-based companies and will apply across the board to all foreign digital service providers. The tax relief will take effect retroactively from July 1, 2025, the date when the law and the fiscal year 2025–26 budget came into force.
A Pakistani delegation is currently in the United States to resolve pending trade issues. This marks the second visit within a short span, underlining the urgency to finalize a bilateral agreement that satisfies US concerns while safeguarding Pakistan’s economic interests. During an earlier meeting between Pakistan’s Finance Minister and US Secretary of Commerce Howard Lutnick, the issue of the digital tax emerged as a major sticking point, particularly due to its impact on large US technology firms.
Despite its financial implications, the government proceeded with the exemption. Sources within the Finance Ministry indicated that the expected revenue loss—estimated in billions of rupees—might be addressed through direct communication between the US government and IMF, where the US holds over 16% of voting rights. The waiver, officials believe, will ease negotiations and mitigate concerns raised by global tech players operating in Pakistan.
The digital tax had initially been introduced to address taxation gaps in cross-border e-commerce, which remained largely untaxed due to treaty limitations requiring permanent establishment for income taxation. FBR had informed the National Assembly’s Standing Committee on Finance that the growing digital presence of foreign businesses in Pakistan was eroding the domestic tax base. As a corrective measure, the Digital Presence Proceeds Tax Act was designed to capture revenue from services such as digital advertising, cloud services, e-learning, online banking, entertainment platforms, and other automated service deliveries.
Under this framework, banks and financial institutions were tasked with collecting tax on payments made to foreign vendors and submitting quarterly reports on international e-commerce transactions. The law also aimed to bring platforms like Temu, operating through online advertisements and sales in Pakistan, into the tax net.
Google, which has a significant operational footprint in Pakistan, had reportedly been assured earlier in July that it would be exempt from the 5% tax and that specific parts of its income could be subject to reduced taxation. Similar benefits are expected for companies such as Meta, Amazon, Microsoft, and Netflix, all of which are deeply integrated into Pakistan’s digital ecosystem. While the exemption offers relief to these firms, the government maintains that the legislation was not intended to target companies with formal business presence in the country but rather to regulate income from those with significant digital presence and no physical operations.
