Mobile communications industry body GSMA has urged the Pakistani government to gradually eliminate the 15% Advance Income Tax (AIT or withholding tax) on essential telecoms services and the 19.5% sales tax on mobile services, which creates additional barriers to digital inclusion for low-income households.
Julian Gorman, GSMA Head of APAC, stated, “Pakistan has the potential to realize its aspiration to become a digital nation. By scaling its connected population and investing in key pillars, Pakistan can unlock its full digital potential, improve the lives of its citizens, and drive sustainable economic growth.”
GSMA urges government to review taxation on telecoms providers and services
In its latest report titled, “Realizing Pakistan’s Aspiration to Become a Digital Nation,” the GSMA said that taxes on service providers, consumer devices and services in Pakistan are among the highest in the world. These taxes, some of which are sector-specific, often impact network investment affordability and have a disproportionate impact on the most vulnerable.
“Policymakers should gradually eliminate the 15% Advance Income Tax (AIT or withholding tax) on essential telecoms services and the 19.5% sales tax on mobile services, which create additional barriers to digital inclusion for low-income households,” the report recommended.
The recently introduced Pakistan Finance Bill imposes a sales tax on low-cost mobile handsets and a steep advance tax on telecom services for specific taxpayers. Additionally, it mandates mobile network operators to disconnect services for non-compliant users.
To mitigate the potential harm to digital inclusion and broader access, GSMA suggested that the sales tax on affordable mobile phones be removed. Furthermore, reducing the advance tax on telecom services could encourage wider usage. By implementing incentives and educational programs, the government can foster voluntary tax compliance. Finally, exploring alternative revenue sources can support the digital economy’s growth without compromising essential services.
Optimal spectrum licensing and roadmap requested
Pakistan is planning a 5G spectrum auction scheduled to be completed by early 2025. Mobile operators in Pakistan currently have around 270 MHz of licensed spectrum and the potential addition of new spectrum bands such as 700 MHz, 2.3 GHz, 2.6 GHz, and 3.5 GHz are necessary to support the expansion of network capacity and the deployment of 5G.
“Yet spectrum cost in Pakistan is already high and ARPU have been declining. Thus, it is imperative that a rational approach to pricing is adopted for the upcoming auction so that the total cost of spectrum is sustainable and operators have the right incentives to invest in network rollout which delivers affordable connectivity to more consumers and lower the broadband usage gap and the digital divide.”
Additionally, denominating spectrum costs in US dollars exposes the operators to significant
currency devaluation risk, given that the depreciation of the local currency adds to higher
spectrum fees paid in US dollars. The unpredictable currency value impacts business plans
and eventually affects company revenues and the retail price for consumers. As a result,
policymakers should consider denominating spectrum payments in local currency, which
would provide greater certainty for operators, given that revenue is also earned in local
currency.
Financing smartphones for all framework
Smartphones are one of the most used devices to access the internet but are not affordable to everyone. Beyond income levels, several supply and demand factors can influence smartphone affordability, including manufacturing costs influenced by factors such as import duties, taxes and transportation charges, and inadequate distribution channels in rural areas.
“In Pakistan, the government has introduced a smartphone financing policy (yet to be approved from cabinet) to improve access to smartphones, particularly for lower-income groups. The policy supports installment-based financing options from operators and third parties, with protections against defaults, to make smartphones more affordable and accessible. These 6 initiatives aim to increase smartphone penetration and digital inclusion, especially for those at the lower end of the socioeconomic spectrum. However, much more needs to be done to further increase adoption and affordability across all regions and demographics.”
Measures to ease short-term pressures
Given the challenging operational environment, including forex and inflationary headwinds, GSMA suggested that policymakers should consider the following measures to mitigate economic pressures and spur long-term planning:
- Review and freeze the forex rate for license-fee payment to mitigate currency risk and remove uncertainty in business planning.
- Stagger license-fee installments over 10 years to provide the much-needed fiscal space and ease cash-flow pressures.
- Review policy-mandated levies, such as universal service funds (USFs) and research and development (R&D) contributions, and consider a moratorium on rollout and quality-of-service obligations.