Application of Sales Tax and Income Tax on e-Commerce Industry
By CFO Oversight | Karachi
In Pakistan, there is continuous development in the process of bringing new sectors into the tax net to increase revenues from direct and indirect taxes. This development has impacted the e-commerce industry too. We have seen that compliance related to income tax has already been introduced in e-commerce related sectors; however, through the Finance Act, 2025 e-commerce is subject to income tax as well as sales tax, initially at a low rate of tax.
Tax application on “E-Commerce” and “Online Market Place” is defined in Income Tax Ordinance, 2001, and Sales Tax Act, 1990 through amendments in Finance Act, 2025.
SALES TAX
Definition:
“E-Commerce” means sales or purchase of goods conducted over computer networks by methods specifically designed for the purpose of receiving or placing of orders either through websites, mobile applications or online marketplace having digital ordering features by using phones, automated computer-to-computer ordering system or any similar device.
“Online Marketplace” means an online interface that facilitates, for a fee, the direct interaction between multiple buyers and multiple sellers via digital orders for supply of goods, with or without the platform taking economic ownership of the goods that are being sold.
From the definition, it is evident that the online marketplace is covered under the term e-commerce, and e-commerce is a wider term.
Registration Requirements:
Every person, including a non-resident person, selling digitally ordered goods from within Pakistan (Goods that are being supplied from Pakistan to a buyer in Pakistan or outside Pakistan) through an online marketplace, website, or software application shall be required to get registered under the Sales Tax Act, 1990 in the prescribed form and manner.
Exception to Registration:
The above requirement of registration shall not apply where the person qualifies for one of the following two categories under the Sales Tax Act, 1990:
- a cottage industry; or
- subject to sales tax through electricity bills only.
These are defined as follows:
Cottage Industry means a manufacturer:
- whose annual turnover from taxable supplies made in any tax period during the last twelve months ending any tax period does not exceed Rs. 10 million;
- who is operating from non-industrial premises and without any industrial utility connection; and
- whose annual electricity bill in any tax period during the past twelve months ending any tax period does not exceed Rs. 600,000.
Entities subject to sales tax through electricity bills are retailers who do not
- operate as a unit of a national or international chain of stores;
- operate in an air-conditioned shopping mall, plaza, or centre, excluding kiosks
- have a credit or debit card machine;
- have a cumulative amount of electricity bills, during the immediately preceding twelve consecutive months, exceeding rupees six hundred thousand; and
- operate as a wholesaler cum retailer.
Any person who does not qualify for any of the above requirements shall be subject to sales tax registration if it operates in e-commerce activities.
Tax Application:
For cottage industry clause (5AB) and Retailers other than Tire-1
The applicable sales tax rate shall be 2% of the gross value of supplies. This will be the final discharge of liability, and no input tax is allowed to be adjusted against this tax liability. The total amount of sales tax shall be deducted by the payment intermediary as explained below.
For Tire 1 retailers integrated with POS
Standard 18% sales tax rate shall apply through POS.
For sales related to e-commerce same withholding shall apply as disclosed for cottage industry and tire 2 retailers not integrated with POS; however, this shall be treated as sales tax withheld, and input tax adjustment is allowed against the standard 18% output liability.
Collection of Tax @ 2% of value of supplies:
Payment intermediaries (banking company, licensed exchange company, other non-banking financial institutions, or payment gateway) and couriers (on a cash-on-delivery basis) in respect of digitally ordered goods from within Pakistan shall be responsible for deducting the sales tax from the sales proceeds of the goods supplied.
The total amount of applicable tax shall be withheld by the above-mentioned withholding agents. They are responsible for depositing the same to the government treasury and submitting a prescribed monthly statement. In case of failure of submission of monthly statement penalty shall be imposed of:
- PKR 300,000 for first default;
- PKR 1,000,000 for every subsequent default.
Requirement of issue of e-bilty is imposed on courier service providers and in case of failure to generate, or misuse, or forgery, the concerned person shall be liable to pay PKR 50,000 total tax burden of the subjected amount.
How Compliance is Ensured?
The requirement is ensured for compliance through the following measures:
- Every online marketplace supplying goods from within Pakistan shall not allow any person to use their service unless it holds NTN and registration under the Sales Tax Act, 1990;
- Every courier engaged in e-commerce by supplying digitally ordered goods from within Pakistan shall not allow any person to use their services unless it holds NTN and registration under the Sales Tax Act, 1990;
An online marketplace and courier service provider will not ask for sales tax registration if the vendor falls under the category explained under the heading “Exceptions to Registration”.
Where an online marketplace or courier service provider allows any unregistered person to use their platform or services shall be liable to pay a penalty of:
- PKR 500,000 for the first default, and
- PKR 1,000,000 for each subsequent default.
INCOME TAX
In Income Tax Ordinance, 2001 concept of tax on digitally delivered services, e-commerce, and online marketplace has already been introduced and is being taxed. However, the Finance Act, 2025 expands the ambit of these terminologies and introduces a final tax regime for these sectors. The enhancements of terms are described below:
Digitally Delivered Services (Section 2(17C)): Includes automatic services delivered via the internet with minimal or no human involvement—such as streaming, cloud computing, SaaS, telemedicine, online banking and, e‑learning.
E‑Commerce (Section 2(19AA)): Covers purchase/sale of goods or services via websites, apps, or digital marketplaces.
Online Marketplace (Section 2(38B)): Expanded to include any digital platform facilitating buyer‑seller relationships, regardless of ownership.
Tax Application:
The Finance Act, 2025 institutes a final tax regime on withholding on local digital and physical goods/services sold via e‑commerce:
- 1% withheld at source for payments made via digital means or banking channels.
- 2% withheld on Cash‑On‑Delivery (COD) transactions via couriers
For non-filers (ATL In-Active) shall be subject to 100% more withholding.
Alike Sales Tax, this shall also be withheld by payment gateways, courier companies, or marketplace operators as agents.
Exported goods or services remain exempt from this regime under Sections 154–154A (i.e. export income)
Conclusion
The Finance Act, 2025 has significantly formalized the taxation framework for the e-commerce sector in Pakistan. All digital businesses—whether individuals, startups, or platforms—must review their operations to ensure compliance with sales tax registration, withholding mechanisms, and digital transaction reporting.
Failing to comply may trigger substantial penalties, along with suspension of digital and delivery services. It is, therefore, strongly advised that e-commerce operators engage with tax professionals for appropriate guidance and timely registration.
What You Can Do?
Avoidance of compliance is never a solution—it’s always about timely compliance, smart planning, and diligent execution. At CFO Oversight, we specialize in providing legally compliant, strategic tax advisory services to startups and SMEs, especially those dealing in e-commerce across Pakistan.
For tax advice and to explore your options, please get in touch with us using the contact details mentioned below.
