Will the removal of digital tax boost growth or just shift the burden elsewhere? Here’s everything you need to know.

In a major shift in its digital economy policy, Pakistan’s government has removed the 5% Digital Presence Tax on foreign e-commerce platforms such as Temu, AliExpress, and Shein—a move many are celebrating as a win for online shoppers and local startups. But beyond cheaper carts, this policy tweak signals much more: an attempt to reboot investor confidence, stimulate the startup ecosystem, and strategically recalibrate trade ties with global giants like the U.S. and China

What Has Changed?

As of July 1, 2025, foreign e-commerce platforms that sell goods to Pakistanis online will no longer be required to pay the 5% tax imposed for having a digital presence in the country. However, the 18% General Sales Tax (GST) still applies, so while some relief is expected, prices will not revert to their pre-tax levels.

Previously, online shoppers were double-taxed:

1. 5% digital presence tax
   
2. 18% sales tax
   

This pricing shock significantly impacted consumer affordability and startup margins. The latest amendment reduces the burden but keeps taxation in play.

What’s the Motivation Behind This Move?

The removal of the digital presence tax appears to be a calculated policy shift designed to:

• Encourage foreign investment, particularly from U.S. tech and e-commerce companies
  
• Reignite public trust in online shopping platforms
  
• Support Pakistani startups, especially those working in e-commerce, dropshipping, warehousing, and logistics
  

It is also speculated that this relief is part of broader trade discussions with the United States. Pakistan has been pushing for deeper digital and trade cooperation, and reducing tax friction for U.S.-based platforms is seen as a goodwill gesture.

However, Chinese platforms like Temu and AliExpress are the primary beneficiaries of this relief raising questions about who actually gains from the policy. While the tax technically applies to all foreign platforms, data shows that over 70% of digital imports by Pakistani consumers come from Chinese e-commerce sites. This casts doubt on the assumption that the move is U.S.-centric.

Who’s Still Paying the Tax?

It’s important to note that this exemption does not apply to all digital services. The following categories are still subject to the 5% tax:

• Streaming platforms (e.g., Netflix, Spotify)
  
• Online gaming services
  
• Cloud-based SaaS tools (e.g., Google Workspace, Microsoft 365)
  
• Digital downloads or services (e.g., software, templates)
  

Only digitally ordered physical goods from platforms like Temu, AliExpress, and Shein are exempt.

Impact on Startups

For Pakistan’s startup landscape, this change brings several implications:

Lower Landed Costs: Dropshipping startups and SMEs importing from China will see reduced product costs, improving profit margins.

Better Market Access: Startups now face fewer barriers to experimenting with global supply chains via platforms like Temu.

Logistics Growth: Startups in logistics, warehousing, and last-mile delivery are likely to see more business from increased online ordering.

Fintech Opportunities: Payment and transaction-focused startups may benefit from the rise in cross-border trade.

However, some experts warn that this tax relief may not be sustainable without broader reforms. If the goal is to ease startup pain points, removing only one layer of tax may fall short. The 18% GST still significantly raises product costs, particularly for price-sensitive consumers.

The Bigger Picture: Real Relief or Short-Term Optics?

This move offers short-term psychological relief to consumers and startups but experts urge caution.

Pakistan’s fiscal deficit remains a challenge, and every tax cut without structural reform increases the burden elsewhere. The government has not announced how it will offset the revenue loss, raising concerns about potential increases in other tax areas or future reversals.

Moreover, the real winners are large-scale foreign e-commerce companies, especially those based in China, not necessarily local startups. Without localization policies, infrastructure improvements, or digital upskilling programs, the ripple effect on domestic entrepreneurship may be limited.

What Comes Next?

The decision to remove the tax signals Pakistan’s openness to global digital trade, but the lack of clarity on long-term digital taxation policy may leave both startups and investors wary. If this policy is to serve as more than just a headline win, it must be followed by reforms that address the broader issues in taxation, trade facilitation, and digital capacity-building.

FAQ