The telecom sector in Pakistan is facing a wide range of taxation, pricing, and regulatory challenges impacting its growth, sustainability, and competitiveness. Some of these issues also extend into related sectors, such as solar infrastructure and local manufacturing, and together, they affect the broader business landscape in the country.

One of the main challenges is the change in the Advance Income Tax (AIT) rate. While the Finance Act in December 2021 increased the rate from 10 per cent to 15pc, it was later reduced to 10pc for FY22 and 8pc for FY23. This tax only applies to tax filers, but most telecom users in the country are non-filers. As a result, the burden of the tax falls on consumers who are not even legally required to pay it, leading to questions about fairness and implementation.

Telecom licenses and spectrum renewals also require a separate regulatory and tax treatment. Currently, these are not clearly distinguished in financial handling, causing confusion and delays. A streamlined framework could bring better transparency and faster processing.

There is also a lack of uniformity in General Sales Tax (GST) and Federal Excise Duty (FED) rates across the provinces. For example, in 2021, the federal government reduced the FED to 16pc, but this was only implemented in the federal capital. The provinces continued charging 19.5pc, and eventually, the capital aligned back to 19.5pc as well. This kind of inconsistency complicates billing and compliance for operators.

Reducing mobile phone and telecom infrastructure taxes can help expand digital access and financial inclusion

Broadband services are currently taxed at 16pc to 19.5pc, regardless of speed. Some relief was introduced in Sindh for users of up to 10 Mbps and students, but this was later withdrawn in 2019. Such measures had initially aimed to support digital inclusion and make internet services affordable, especially for low-income users.

The tax burden also extends to components of telecom infrastructure. For instance, batteries used in solar systems by telecom companies are taxed under multiple layers — customs duties, regulatory duties, and additional charges. Reducing these taxes would help telecom operators adopt renewable energy solutions and reduce operational costs, aligning with national energy policy.

Telecom companies also face income tax deductions on several operational expenses, including utility bills for thousands of cell sites. This results in not just financial strain, but also extra administrative processes. Tax authorities themselves struggle to verify many of these deductions, which adds to the systemic inefficiencies.

High mobile phone taxes are another hurdle. Reducing these taxes could make smartphones more accessible, expand telecom reach, and support digital growth. Additionally, taxes on imported phones could be aligned with passport or CNIC registrations to improve monitoring without overburdening consumers.

In terms of equipment, the Customs Authority has set high valuation rates for Optical Network Terminals (ONTs) and Wi-Fi access points, which are well above market prices. These items are not manufactured locally and must be imported, making the elevated valuations an unnecessary cost increase.

The fixed minimum tax introduced in 2015 transformed income tax into an indirect tax for telecom companies. The current 4pc rate is a major concern for companies already under financial strain. Moreover, it complicates tax filings and increases the administrative workload for both telecom firms and the tax authorities.

In Balochistan, the mismatch in sales tax input and output rates also creates confusion. Supplies are taxed at 18pc, but input tax on services is calculated at 17pc, leading to business recoverability issues.

To support local manufacturers of optical fiber cables (OFC), raw materials like polyethylene, steel tape, and steel wire must be placed in the 0pc customs duty category. Right now, foreign manufacturers benefit from export rebates, while local producers face higher input costs. Supporting local firms could promote job creation and save foreign exchange.

Meanwhile, high imports of finished OFCs are threatening the survival of local factories. Increasing the regulatory duty on these imports to 30pc — in line with other protected industries — could help level the playing field and reduce unnecessary foreign exchange outflow.

Pakistan has exported 36,000 km of OFC worth $15.45 million to countries such as the UAE and Saudi Arabia, with $10m earned without government support. However, the absence of OFCs from the Duty Drawback SRO 211(I)2009 limits the sector’s ability to claim duty refunds, reducing competitiveness against Indian and Chinese exporters.

If these issues are addressed, the Pakistani economy stands to benefit in several ways. Reducing mobile phone and telecom infrastructure taxes can help expand digital access and financial inclusion. Support for local manufacturing can drive industrial growth, reduce imports, and improve the trade balance. Simplifying tax processes can reduce operational inefficiencies and improve compliance. Altogether, a more supportive policy environment could boost investment, create jobs, and help Pakistan leverage its telecom and tech potential for long-term economic growth.

The writer is the head of content at a communications agency

Published in Dawn, The Business and Finance Weekly, April 14th, 2025