Islamabad: Pakistan’s telecom industry is currently navigating a complex web of taxation, regulatory ambiguity, and pricing challenges, which are stifling growth, investment, and innovation.
These issues also spill over into connected sectors such as renewable energy and domestic manufacturing, collectively affecting the broader economic landscape.
One significant concern is the fluctuation in Advance Income Tax (AIT) rates. The Finance Act of December 2021 raised the AIT from 10% to 15%, only for it to be revised to 10% for FY22 and 8% for FY23.
Although this tax is meant for registered filers, the majority of mobile users in Pakistan are non-filers, effectively placing an unfair burden on individuals not legally liable for the tax.
This raises concerns about both equity and enforcement.
Another persistent problem involves the handling of telecom licenses and spectrum renewals.
Currently, these are not separated clearly in terms of taxation and regulation, leading to administrative delays and financial confusion.
A more structured policy framework could ease processing and enhance transparency.
Tax Burden
Tax disparities across provinces further complicate matters. In 2021, the federal government reduced the Federal Excise Duty (FED) on telecom services to 16%, but this reduction was only adopted in Islamabad.
The provinces continued charging 19.5%, eventually pushing the federal capital to revert to the higher rate as well. Such inconsistencies add layers of complexity for telecom operators, particularly in billing and tax compliance.
Broadband services remain taxed between 16% and 19.5%, regardless of internet speed. Earlier relief measures in Sindh for students and users of lower-speed connections were rolled back in 2019, reversing efforts to promote digital inclusion.
The financial strain extends to telecom infrastructure, especially in efforts to adopt green energy solutions. Batteries used in solar systems — critical for powering remote cell sites — are taxed through customs duties, regulatory levies, and additional charges.
Reducing these taxes would encourage the shift toward renewable energy, aligning with Pakistan’s energy goals and reducing operational costs for telecom providers.
Income tax deductions on routine operational expenses, such as utility bills from thousands of network towers, further stress company finances.
Complicated tax filings and verification difficulties have also made compliance burdensome for both telecom firms and tax authorities.
Mobile phone taxation remains a major obstacle to digital access. Lowering duties could increase smartphone penetration, enabling broader internet usage and financial connectivity.
Aligning phone import taxes with CNIC or passport data could help improve monitoring without discouraging users through excessive costs.
Optical Network Terminals
Customs valuations for essential telecom equipment like Optical Network Terminals (ONTs) and Wi-Fi access points are another area of concern.
These components are not manufactured locally but face artificially inflated customs values, raising import costs unnecessarily and hampering network expansion.
Since 2015, telecom companies have been subject to a fixed minimum income tax of 4%, which in effect turns income tax into an indirect levy, adding strain to an already pressured sector.
This system not only complicates taxation but also increases the administrative workload across the board.
In Balochistan, a mismatch between the sales tax input and output rates — 18% on supplies versus 17% on input services — creates confusion and limits business recoverability.
Local manufacturers of optical fiber cables (OFCs) face steep challenges due to higher input costs.
Essential materials like polyethylene and steel tape are taxed at standard rates, while international competitors benefit from export rebates and lower production costs.
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Exempting raw materials for OFCs from customs duties could support domestic production, reduce import reliance, and generate employment.
Simultaneously, large volumes of finished OFCs are being imported into Pakistan, threatening the viability of local factories.
Raising the regulatory duty on these imports to 30% — as is done in other protected sectors — could help level the playing field and retain foreign exchange.
Pakistan has already made inroads in exporting OFCs, shipping 36,000 kilometers valued at $15.45 million to countries like Saudi Arabia and the UAE.
Of this, $10 million was generated without government incentives.
Yet, the sector is excluded from the Duty Drawback SRO 211(I)2009, making it harder for exporters to claim refunds and remain competitive against regional players like India and China.
If tackled comprehensively, these issues present an opportunity for economic transformation. Reducing taxes on mobile phones and telecom infrastructure could drive digital adoption and financial inclusion.
Support for domestic manufacturing would bolster industrial development, improve the trade balance, and create jobs.
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Streamlined tax policies and consistent regulatory frameworks would cut red tape and attract investment.
A forward-looking telecom policy could unlock the sector’s full potential and help position Pakistan as a serious player in the global digital economy.
