The Federal Cabinet has approved a framework that requires social media companies to work in accordance with the rules and regulations of the Government of Pakistan.
According to the framework, social media giants including Facebook, Google, YouTube, and Twitter will be required to set up their offices in the country and directly file taxes to the Federal Board of Revenue (FBR).
The FBR has fixed a revenue collection target of Rs. 10 billion from the social media sector for FY 2021-22. However, due to the lack of offices of social medial companies in the country, the FBR is expected to miss out on the target.
It is going to collect only a fraction of this target and that too by deducting tax from the users of these companies in the country for availing their digital services.
The government introduced a sub-clause 22B in section 2 and amended section 6 of the Income Tax Ordinance through the Finance Act, imposing a 15% fee on all offshore digital services.
The aim of amending the Income Tax Ordinance is to impose taxes on a number of digital business activities, including virtual commodities such as software, websites, applications, and other digital assets.
It also envisions bringing digital services like online sale and purchase, online advertisements, and digital consumer analysis under the tax net.
The rationale behind the move is to collect the majority of the taxes from the offshore social media companies for providing digital services in the country instead of collecting the taxes from the citizens by reverse charge mechanism for using their digital services.
Since tax collection from the social media industry is expected to remain nearly non-existent despite the amendments to the Income Tax Ordinance, the government has decided to introduce a framework that requires tech giants to open their offices and operate directly from the country.