Pakistan’s heavy sector-specific taxation on mobile telecom services is suppressing digital adoption. It slows down critical investment and hurts long-term economic growth. Frontier Economics prepared a groundbreaking report for VEON titled “Unlocking Digital Growth by Reducing Sector Taxation in Pakistan”. The study warns that high telecom levies and mobile taxes create a dangerous “tax trap”. These levies artificially raise consumer prices. Consequently, they discourage smartphone adoption and limit the expansion of the digital economy.
Telecom Levies & Mobile Taxes: The Harsh Reality
Currently, Pakistan functions as a mobile-first economy. Mobile connectivity underpins digital inclusion, financial access, and formal economic participation. However, excessive taxation risks undermining the wider digitalisation agenda.
The numbers paint a bleak picture:
- A staggering 68% of Pakistanis aged above 15 still do not own a smartphone.
- The country ranks 101st out of 105 countries in average mobile internet speeds.
- The average download speed sits at a low 24 Mbps.
- The monthly average revenue per user (ARPU) remains trapped around $1. This reflects weak affordability and low digital consumption across the population.
- Pakistan’s 4G population coverage stands at 81%, which falls significantly below the 94% average for Low-Income and Middle-Income Countries.
Furthermore, the current tax structure completely contradicts the principle of efficient taxation. Efficient systems require broad-based taxes rather than concentrated burdens on critical sectors. Instead, Pakistan imposes one of the highest mobile tax burdens in the region. For example, consumers face a massive 37% combined sales and turnover tax rate on mobile services. This includes a 19.5% sales tax, a 15% advance income tax (AIT) from customers, and a 2.5% annual regulatory duty.
Operators face severe financial hurdles as well. The state taxes corporate profits at 29%, plus an additional super tax of up to 10% depending on profitability. In addition, the government links spectrum license fees to the US dollar. This practice transfers immense currency exchange rate risk directly to the telecom sector. Consequently, the local currency’s 50% depreciation since 2017 has effectively doubled nominal periodic payments. Finally, custom and import duties on essential network equipment reach up to 246%.
Unlocking GDP Growth Through Tax Reform
The report features a rigorous econometric analysis to show how connectivity drives prosperity. Specifically, a 1% increase in mobile penetration raises real GDP per capita growth by 0.115% points. Therefore, improving connectivity could lift Pakistan’s annual GDP per capita growth rate from its current baseline of 4.2% to nearly 4.5%.
Frontier Economics modeled a clear path forward. The report proposes a major tax reform scenario to start in 2027. This reform will bring mobile sector taxes in line with the wider economy.
| Tax Measure | Baseline Structure | Proposed 2027 Reform |
| Combined Sales / Turnover Tax | 37% | 17% |
| Advance Income Tax (AIT) | 15% | Eliminated (0%) |
| Annual Regulatory Duty | 2.5% | 1% |
| General Sales Tax | 19.5% | 16% |
| Corporate Profit Tax | 39% (Max) | 39% (Unchanged) |
The Medium-Term Fiscal Payoff
Lower taxes will immediately stimulate mobile usage. As a result, the reform will improve access to markets, enhance public services, reduce transaction costs, and support job creation. In addition, deeper digital adoption will accelerate the formalisation of the economy. Digital transactions create auditable records and improve tax compliance, which ultimately broadens the national tax base.
Initially, the government will face a short-term decline in telecom tax revenues. The model projects that mobile sector tax revenues will drop by approximately $439 million per annum. This reduction equals about 1% of total government tax revenues.
However, broader economic gains will eventually offset these losses. The modeling assumes a one-year lag for connectivity changes to boost economic activity. According to the projections, annual government tax revenues will turn positive by 2031. Furthermore, cumulative fiscal gains will fully break even in present value terms by 2035.
Ultimately, the report urges the government to abandon short-term revenue targets. Instead, Pakistan must rebalance its tax policy away from sector-specific levies that directly inflate consumer prices. Embracing this change will safeguard the country’s wider digitalisation agenda and unlock sustainable economic growth.
