Taxation of digital transactions within Pakistan

Taxation of digital transactions within Pakistan: A tax has been introduced at rates varying from 0.25%, 1% and 2% of the gross amount, on every person who receives payment for supply of digitally ordered goods or services which are delivered from within Pakistan using locally operated online platforms including online marketplace or websites. The online marketplace includes online interfaces that facilitate, for a fee, the direct interaction between multiple buyers and multiple sellers via digital orders for supply of goods and services, with or without the platform taking economic ownership of the goods or providing or rendering the services that are being sold.

The tax so charged is a final discharge of tax liability. Additionally, no further withholding tax incidence would occur on the payment from buyer to the seller.

The expression ‘digitally delivered services’ has been defined to mean any service delivered over the internet or electronic networks, where the delivery is automated and require minimal or no human intervention including music, audio and video streaming services, cloud services, online software applications services, services delivered through online inter-personal interaction i.e., tele medicines, e-learning etc., online banking services, architectural design services, research and consultancy reports, accounting services in the form of digital files or any other online facility.

Furthermore, every payment intermediary including a courier business collecting cash from a buyer under Cash on Delivery (CoD) payment terms is required to collect tax from the gross amount payable (including sales tax, if any) to the seller at the aforementioned rates. The expressions “courier service” and “payment intermediary” are defined as under:

‘’courier service’’ means any specialized entity that provides fast, secure and often tracked transportation of documents, packages and small freight, typically offering door-to-door delivery solutions of goods within specific timeframes and in case of digitally ordered goods in e-commerce delivery and collection of cash on behalf of the seller and such delivery service provider includes but not limited to –

• Logistics services;
• ride-haling services;
• food delivery platforms; and
• e-commerce services.

‘‘payment intermediary’’ means any third party including a banking company, financial institution, a licensed foreign exchange company or payments gateways that facilitate the transfer of funds or payment instructions between two or more parties to enable, process, route or settle payments in a financial transaction, without being the ultimate source or recipient of the payment.

Every payment intermediary and courier service responsible for deducting tax, as above, is also required to file a quarterly income tax withholding tax statement in respect of tax deduction regarding sale of digitally ordered goods and services. Moreover, every online marketplace is also required to file a monthly statement containing prescribed particulars of vendors registered on its platform supplying digitally ordered goods and services.

Every person selling digitally ordered goods or services from within Pakistan using online marketplace or a courier service, is required to obtain registration with the FBR.

Online marketplaces are mandatorily required to allow only such vendors who are registered with the FBR for income tax and sales tax purposes to carry out e-commerce transactions.

Penalties have also been prescribed in case of noncompliance with the relevant provisions of the law as follows:

S. No.	Offence	Penalty
1A	Where any person fails to furnish a statement as required under section 165C within the due date	Such person shall pay a penalty of Rs.50,000 if the person had already paid the tax collected or withheld by him within the due date for payment and the statement is filed within ninety days from the due date for filing the statement and, in all other cases, a penalty of Rs.2,500 for each day of default from the due date subject to a minimum penalty of Rs.10,000.
3B	Where an online marketplace allows an unregistered vendor, whether resident or a non-resident involved in e-commerce business supplying digitally ordered goods or services, who is required to register under Sales Tax Act 1990 and Income Tax Ordinance, 2001, under section 181 before using the platform	Such online marketplace or a courier service provider shall pay a penalty of Rs.500,000 for the first default and Rs. 1 million for every subsequent default. Provided that where it stands established that no tax was required to be deducted or collected during the relevant period, minimum amount of penalty shall be Rs.10,000.
12B	Where a banking company or payment gateway or a courier service provider, as the case may be, fails to deduct tax at the time of making payment to a seller, or fails to pay the tax deducted as required under section 160, with respect to digitally ordered goods or rendering or providing of digitally delivered services using e-commerce platform	Such person shall pay a penalty equal to 100% of the amount of tax involved
15A	Any seller supplying digitally ordered goods and digitally delivered services through online marketplace who is required to be registered under Sales Tax Act, 1990 and Income Tax Ordinance, 2001, fails to register under the aforementioned statutes	Such seller shall pay a penalty of Rs.500,000 for the first default and Rs.1 million for every subsequent default

Sales tax:

Supplies made through online marketplaces and other online modes are subject to sales tax at the standard rate. However, in case of local supplies made by a non-active supplier, the online marketplace is required to withhold 1% sales tax on those supplies. The Bill has abolished this sales tax withholding on supplies by non-active suppliers and proposed a new scheme for overall e-commerce trade.

Under the proposed scheme, supply of digitally ordered goods would be taxed at a rate of 2%, which would be final discharge of sales tax liability for online marketplaces, vendors at online marketplace, websites, software application for such supplies. However, no input tax adjustment will be allowed against the same.

The liability to collect and pay sales tax at the rate of 2% will be on the ‘‘courier’’ for supplies made on a CoD basis and on the ‘‘payment intermediary” in case of digital payments. The terms courier and payment intermediary are proposed to be defined as under:

“courier” means any entity engaged in the delivery of goods and collection of cash on behalf of a seller including logistic services, ride-hailing services, food delivery platforms and ecommerce delivery services.”

“payment intermediary” means a banking company, any financial institution including a licensed foreign exchange company or payment gateway that facilitate the transfer of funds or payment instructions between two or more parties to enable, process, route, or settle payments in a financial transaction,
without being the ultimate source or recipient of the payment.

Additionally, the Bill proposes that sales made by Tier-1 retailers through e-commerce will be subject to collection and payment of tax at a rate of 2% rather than the applicable rate of sales tax.

The Bill proposes mandatory registration for every person, including a non-resident person, selling goods from within Pakistan through an online marketplace, website or software application, in the prescribed form and manner.

To implement the registration measure for such persons, the Bill proposes to restrict any person to use services of online marketplaces and couriers from conducting e-commerce transactions unless that person is registered for income and sales tax purposes.

To ensure accuracy and compliance with the aforementioned legal provisions, the Bill proposes the submission of a monthly statement in the prescribed form by online marketplaces, payment intermediaries and couriers. This statement will detail vendor-wise amount of supplies made of taxable digitally ordered goods, corresponding tax due and any other prescribed information, irrespective of the economic ownership of supplies from within Pakistan.

Moreover, the Bill also proposes following new penalties for online marketplaces, payment intermediaries, and couriers for those who fail to submit the required monthly statements on time and to those who permit unregistered persons to utilize their services in e-commerce transactions.

Offences	Penalties and punishments	Section of the Act to which offence has reference
1A. Where any online marketplace, payment intermediary or courier fails to furnish prescribed	Such person shall be liable to pay a penalty of Rs.500,000 for first default and Rs.1 million for each subsequent default.	26

 

Offences	Penalties and punishments	Section of the Act to which offence has reference
monthly statement within due date
1B. Where any online marketplace, courier allow use of its services in the course of e-commerce by unregistered persons	Such person shall be liable to pay a penalty of Rs.500,000 for first default and Rs.1 million for each subsequent default.	14