Traders asks govt to withdraw rising taxes on digital transactions globally

F.P. Report
ISLAMABAD: The business community, including retailers and online businesses, has expressed its severe concern over the increasing restrictions and taxes on payments for International Digital Services through banking channels, including Debit/Credit Cards and Commercial Remittances. In addition, the Federal Board of Revenue has raised withholding tax (WHT) by 400% from 1% to 5% for active taxpayers on international transactions on debit/credit cards. Although this tax may be adjustable at the time of annual tax return filing, it temporarily increases the cost per transaction and funding requirements for persons making payments for commercial purposes. Similarly, 16% FED on bank charges also adds to the transaction cost of such transactions.
Through a joint statement issued here today, the Chainstore Association of Pakistan (CAP) said that the recent adverse actions by both the State Bank of Pakistan (SBP) and the Federal Board of Revenue (FBR) have been enacted to restrict the outflow of foreign currency. Whereas tens of thousands of freelancers, businesses, and startups in Pakistan heavily rely on international digital services and platforms for various commercial pursuits and earn foreign exchange through Social Media Marketing, Search Engine Advertising, Domain Registration, Website Hosting, Cloud Storage, Subscriptions, and licenses of Business Software/Tools and e-Commerce Platforms amongst many others. The frequency of payments for such services ranges from multiple times a month to once per annum, depending on the type.
With respect to payments through debit/credit cards, the State Bank of Pakistan previously issued ‘FE Circular No. 07 of 2022’ on November 8, 2022 which restricted commercial transactions on personal cards and set an annual limit of USD 30,000 per individual.
Although the business ecosystem supports the principle of restricting commercial transactions on cards issued for personal purposes, freelancers and small & medium-sized businesses currently have very limited options to make payments for international digital service providers.
Meanwhile, less than a handful of commercial banks offer Corporate Credit Cards, and the application process for issuance of the same is prohibitive for most businesses. In the latest development, these banks have now notified their customers that payments against international digital services are not included in the ‘Merchant Categories’ list for payments through the Corporate Credit Cards w.e.f. August 1, 2023.
This exclusion has eliminated all practical options for an already throttled business community in terms of making payments for international digital services and threaten their survival.
Most freelancers and SMEs in Pakistan operate small-scale businesses which face many challenges including (a) needing to make small and frequent payments; (b) not qualifying for credit limits from digital service providers which provide the same; (c) not possessing the funds to make large payments in advance for digital services; (d) lacking strong relationships with commercial banks which is essential for satisfactory service; or (e) cannot comply with the documentary requirements to process such commercial remittances regularly.
Moreover, in light of recent restrictions on outbound foreign remittances, the few businesses that can utilize the SBP facility for ‘Remittances to Digital Service Providers’ have faced, and many continue to face, inordinate delays in ensuring timely payments through banks, which badly disrupt their business activities.
Most importantly, the majority of international digital service providers do not provide the option to make payments via commercial remittances and must be paid through debit/credit cards via internet payment gateways.
Such payment restrictions and taxes hurt economic activity in Pakistan that either brings substantially more foreign currency into the country than flows outward (b) serves to develop the domestic online ecosystem so that reliance on imported services reduces over time.
Lastly, because of these short-sighted policies, it has been observed that many individuals and businesses are parking funds abroad or finding alternate methods for making payments, which is highly counter-productive for documentation, taxation, and sustainable & equitable growth of the economy as a whole especially for women entrepreneurs, freelancers, and SMEs.