Pakistan's Mobile Tax Trap: A Barrier to Digital Progress
A new report commissioned by telecom group VEON and prepared by Frontier Economics has highlighted that Pakistan's heavy taxation of mobile services is creating a "tax trap." This trap raises connectivity costs, suppresses mobile adoption, and slows the country's broader digital transformation agenda.
The study argues that Pakistan's telecom sector is among the most heavily taxed in the world. Excessive levies on mobile services undermine efforts to expand digital inclusion, promote financial technology, and broaden the country's tax base through greater formalization of the economy.
Current Tax Burden on Mobile Services
According to the report, mobile services in Pakistan face a combined sales and turnover tax burden of 37%. This includes a 19.5% sales tax, a 15% advance income tax collected from customers, and a 2.5% annual regulatory duty. Additionally, telecom operators are subject to a 29% corporate income tax and a 10% super tax on profits.
These taxes ultimately translate into higher prices for consumers, discouraging both mobile adoption and data usage. Digital connectivity is increasingly essential for accessing education, healthcare, financial services, and e-commerce.
The Self-Reinforcing Tax Trap
"High taxes on mobile services reduce penetration and usage, slowing digitalisation. Slower digitalisation constrains the growth of the formal economy and keeps the tax base narrow," the report states, describing the situation as a self-reinforcing "tax trap" that can limit long-term economic growth.
The findings come as Pakistan seeks to accelerate digitalisation, expand broadband access, and prepare for future technologies such as 5G. However, industry stakeholders argue that high taxation is working against these objectives by reducing affordability for consumers and limiting operators' ability to invest in network expansion.
Comparison with Regional Peers
The report notes that Pakistan stands out as one of the least supportive telecom tax regimes globally. Compared with regional peers, Pakistani consumers face substantially higher taxes on mobile services, second only to Bangladesh. Pakistan has one of the highest combined sales tax rates on mobile internet services in the region at 35% for the 2024/25 period, trailing only Bangladesh (39%).
This high tax structure creates a significant barrier to digital adoption. Currently, 68% of individuals aged 15 and older do not own a smartphone. The country ranks 101st out of 105 countries in average internet speeds, and the average revenue per user (ARPU) stands at a low $1 per month.
Broader Economic Implications
Researchers argue that the country's reliance on telecom taxes reflects a broader challenge faced by many developing economies. Because mobile operators are formal, visible, and relatively easy to tax, governments often depend on the sector for revenue collection. However, this approach may generate short-term fiscal gains at the expense of long-term economic development.
"Mobile connectivity has positive spillovers across the economy," the report notes. Widespread internet access improves productivity, expands market access, supports digital payments, and helps bring economic activity into the documented economy. The study estimates that a 1% increase in mobile penetration is associated with a 0.115 percentage-point increase in GDP per capita growth (shifting a baseline growth rate from 4.2% to approximately 4.5%).
Potential Benefits of Tax Reforms
The report further argues that lower taxes could stimulate demand for mobile services, increase network investment, and eventually expand the government's revenue base through higher economic activity. Under a modelled reform scenario, Pakistan's combined sales and turnover tax burden on mobile services would fall from 37% to 17% through reductions in customer taxes and regulatory charges.
While such reforms could initially reduce government collections from the telecom sector, the study projects that increased mobile adoption, higher usage, and stronger economic growth would offset revenue losses over time. Frontier Economics estimates that tax reforms could become revenue-positive for the government by 2031 as digitalisation expands economic activity and improves tax collection from a broader base.
Industry Calls for Action
The findings are likely to add momentum to calls from Pakistan's telecom industry ahead of the federal budget. Operators have urged the government to reduce the 15% advance income tax on mobile usage, abolish duties on telecom equipment, and rationalise sector-specific levies. They argue that lower taxes would improve affordability and accelerate broadband expansion in underserved areas.
With nearly one-third of the population still outside 4G coverage and fixed broadband penetration remaining among the lowest in the region, the report concludes that tax policy will play a critical role in determining whether Pakistan can achieve its digital economy ambitions or remain trapped in a cycle of high telecom taxation and slower digital growth.
