High Taxes on Mobile Services Are Holding Back Pakistan’s Digital Economy, New Study Warns

By Tanveer Ahmed :

Pakistan’s heavy taxation on mobile telecom services is slowing digital growth, discouraging investment and preventing millions of people from joining the country’s digital economy, according to a new report prepared for VEON by economic consultancy Frontier Economics.

The study argues that Pakistan has become one of the most heavily taxed mobile markets in the world, creating what researchers describe as a “tax trap” that raises costs for consumers, weakens internet adoption and limits the expansion of digital services across the country.

The report, titled “Unlocking Digital Growth by Reducing Sector Taxation in Pakistan,” comes at a time when the government is attempting to accelerate digital transformation, expand online payments and prepare the country for wider deployment of 5G technology.

According to the findings, a large majority of Pakistan’s population still lacks access to modern digital tools despite rapid global technological change. Researchers estimate that nearly 68% of Pakistanis above the age of 15 do not own smartphones, limiting access to online education, digital banking, e-commerce and government services.

The report also highlighted Pakistan’s poor internet infrastructure, noting that the country ranks near the bottom globally in average mobile internet speeds. Analysts said weak network investment combined with affordability issues has slowed the development of a stronger digital ecosystem.

Pakistan’s telecom sector has long struggled with low consumer spending compared with other regional markets. The report stated that monthly average revenue per mobile user remains close to only one dollar, reflecting weak purchasing power and limited digital consumption.

Researchers argued that multiple layers of taxes imposed specifically on the telecom sector are significantly increasing the cost of mobile connectivity for ordinary users. These taxes include sales tax on telecom services, advance income tax charged on consumers and annual regulatory duties imposed on operators.

According to the study, the combined burden of taxes and duties on mobile services currently stands at around 37%, making Pakistan one of the highest-taxed telecom environments globally. In addition to consumer-facing taxes, telecom companies are also subject to a 29% corporate tax rate along with an extra super tax.

The report warned that such high taxation discourages mobile internet usage and reduces incentives for telecom operators to expand network coverage or invest in newer technologies such as fibre connectivity and 5G infrastructure.

Researchers described Pakistan as a “mobile-first economy” where mobile connectivity serves as the primary gateway to education, financial inclusion, e-commerce, digital payments and online public services, particularly in areas with limited fixed broadband access.

The study’s economic analysis found that increases in mobile penetration could directly contribute to economic growth. According to the report, every 1% rise in mobile connectivity may increase GDP per capita growth by around 0.115 percentage points.

Analysts estimated that stronger digital adoption could gradually lift Pakistan’s annual GDP growth rate while also expanding the formal economy by increasing digital transactions and improving financial documentation.

The report further argued that broader use of digital payments and mobile-based financial services could help widen Pakistan’s tax base over time by shifting more economic activity into traceable digital channels.

As part of its recommendations, Frontier Economics proposed a gradual reduction in telecom-specific taxes beginning in 2027. Under the suggested framework, the overall tax burden on mobile services would be reduced from 37% to 17%, while advance income tax on consumers would be eliminated entirely.

Researchers projected that lower taxes could increase telecom sector revenues through higher smartphone adoption and rising data usage. The study estimated that a significant share of future growth would come from millions of new users entering the digital economy for the first time.

Although the government could initially face a decline in direct telecom-sector tax revenues, the report argued that long-term economic gains from higher digitalisation, stronger GDP growth and greater formalisation of the economy would eventually offset those losses.

According to the projections, broader fiscal benefits could begin turning positive by 2031, with cumulative economic gains continuing to grow in the following years.

The study warned that unless reforms are introduced, Pakistan risks remaining trapped in a cycle where high telecom taxation suppresses digital adoption, forcing authorities to rely even more heavily on taxing a narrow segment of the economy.

Researchers urged policymakers to gradually move away from sector-specific telecom taxes and instead focus on expanding the country’s broader tax base through digital inclusion, higher financial participation and stronger economic formalisation.

The findings add to growing debate within Pakistan’s technology and business sectors over whether current taxation policies are undermining the country’s ambitions to build a modern digital economy capable of supporting long-term economic growth and technological development.

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