For the first time in Pakistan’s fiscal history, the federal government has turned its attention decisively towards the digital economy. With the proposed measures in the 2025-26 federal budget, the government aims to bring online commerce under the tax net, introducing a wide array of new levies that will come into effect from July 1. These include taxes ranging from 0.25% to 2% on all digitally ordered goods and services sold by local sellers, a flat 2% sales tax on digital transactions, and stringent documentation requirements for e-commerce businesses. Foreign sellers have not been excluded either: a 5% tax will now apply to cross-border digital payments and digital ad spending targeting Pakistani consumers.

While the intent — to widen the tax base and regulate a growing segment of the economy — may be justified in principle, the timing, scope, and execution of these measures raise serious concerns. E-commerce in Pakistan is still in its developmental phase. Many of the businesses thriving online are small-scale, home-based enterprises run by students, homemakers, and part-time entrepreneurs who rely on platforms like Instagram, Daraz, or Foodpanda for side incomes. Burdening them with layers of bureaucratic compliance could be counterproductive, pushing informal sellers further into the shadows rather than integrating them into the formal economy.

Moreover, younger Pakistanis, the demographic most engaged in digital commerce, are already grappling with unemployment, underemployment, and reduced purchasing power. These new taxes will either be passed on to consumers — increasing the cost of everyday services — or absorbed by sellers, squeezing already thin profit margins. Either way, this may stifle innovation and discourage digital entrepreneurship at a time when the country needs it most.

Logistical hurdles further complicate matters. Courier companies, now expected to collect and remit some of these taxes, may lack the technological infrastructure or legal clarity to execute this task effectively. A rushed implementation without proper stakeholder consultation risks widespread confusion, inefficiency, and even non-compliance.

To be sure, the state has a legitimate interest in taxing the digital economy — not only to raise revenue but also to establish fair rules of competition. However, the process must be gradual, inclusive, and mindful of ground realities. A phased approach, supported by incentives for small sellers to register, simplified tax filing systems, and capacity-building among intermediaries like courier companies, would have been far more sustainable.

The government must pause and reconsider the operational impact of these measures. Without carefully addressing the genuine concerns of digital entrepreneurs and consumers, this attempt to regulate may end up strangling one of the few growing sectors of Pakistan’s fragile economy.