Banks Are Now Charging New Tax on Netflix Subscription Fees in Pakistan

After forcing banks to deduct 13 percent of provincial sales tax on advertisement services last year, the Sindh Revenue Board (SRB) has now imposed additional taxes on Netflix. Banks are now charging new tax on the video-on-demand streaming service in Pakistan. Netflix users are now subjected to a 3 percent Sales Tax on IT Services for paying subscription fees with debit/card cards. Additionally, there is a 5 percent Advance Tax on International Transactions (Filers), and Card Transaction Charges have been set at 4 percent, plus a Federal Excise Duty. The advance tax on international transactions for non-filers is different. The advance tax on non-ATL individuals should be 10 percent. Banks are now acting as withholding agents on behalf of SRB to collect the additional taxes on Netflix. Notably, SRB first imposed the Sindh Sales Tax Special Procedure (Tax on Specified Services) Rules, 2023 (the Rules) (see notification No. 3-4/46/2023, dated 27 September 2023) and specified certain banks and other entities, licensed or authorized by the State Bank of Pakistan, as “collecting agents” for sales tax on IT and advertisement services. Resultantly, the board imposed a tax rate of 3 percent on services provided by software or IT-based system development consultants, including cloud-based content streaming services (like Netflix) for which payment is made through a collection agent using any means to transfer payments to any service provider not residing in Pakistan. Netflix says on its website that depending on where the user lives, they may be charged taxes in addition to their subscription price. Last week, ProPakistani reported that the new Finance Bill 2024 now includes a tax on tech companies that earn income in Pakistan through digital means/presence. This way, Netflix due to its business presence in Pakistan is now liable to pay tax for charging customers in the region. The impact of these taxes will be covered by making consumers pay. It is pertinent to mention here that FBR last month served a notice to Netflix for recovery of over Rs. 200 million in income tax as per section 6 of ITO, 2001. It has also emerged that companies rendering offshore digital services are hiding behind Double Taxation Agreements (DTA) to allegedly evade the tax. DTA is a contract signed by two countries to avoid or alleviate (minimize) territorial double taxation of the same income by the two countries. The government of Pakistan introduced section 6 in the Income Tax Ordinance 2001 to bring every non-resident person who receives any Pakistan-source royalty fee for offshore digital services or fee for technical services.