Mobile subscribers in Pakistan are subject to taxes and fees that apply to devices and SIM card usage charges. These taxes are especially likely to increase the prices ultimately paid by consumers, affecting the poorest consumers in particular. Many of these taxes are sector-specific or have higher rates than other sectors of the economy. The changes announced in the latest budget are a step towards reducing the distortive taxation on the mobile sector.
In 2015, 3% (or approximately US$1.1 billion) of total government tax revenues collected in Pakistan originated from Mobile Network Operators (MNOs). Their contribution to the wider economy is just as significant. MNOs brought in over 23% of all Foreign Direct Investment into Pakistan during the period 2003 to 2015. In 2015, their turnover accounted for around 1% of the country’s GDP . Despite the contribution of mobile to the Pakistani economy, sector-specific taxes are hampering affordability and Operator’s incentives to invest.
Inevitably, this situation affects the take-up of mobile services. Today, less than one in ten Pakistanis use Mobile Broadband (3G and 4G) services. By 2020, this is forecast to rise to about three in ten. However, actual mobile ownership is only forecast to grow by 5% over the same period, as illustrated in the figure below. The majority of new mobile broadband users are going to be upgrading from 2G. They are unlikely to be new users. As such, the digital divide – between those that have access to the internet and those that do not – may remain substantial in Pakistan for years to come.
Figure 1 (Source: GSMA Intelligence. Note: After Q3 2016 all values are GSMAi forecasts)
The scope to expand mobile and mobile broadband penetration is currently limited by the fact that the cost of acquiring and using a mobile is too high for many citizens. This is despite the fact that prices for mobile data are, in comparative terms, some of the lowest in the world. In a recent survey of 1,000 Pakistanis, people who owned phones were asked why they don’t use them to connect to the internet. Of those people, 57% cited the expense of the appropriate handset, and 42% the cost of the service, as being the main reason that they are not online. 
On May 26th 2017, Pakistan’s Finance Minister, Ishaq Dar, unveiled the government’s 2017-2018 budget. The announcement included significant reductions to mobile sector taxation that will support the affordability of mobile ownership and usage and will incentivise investment.
• The Federal Excise Duty (FED) on the usage of mobile services, the equivalent of a sales tax in federal territories, was reduced from 18.5% to 17%  . At the same time, provincial governments, which set sales taxes of up to 19.5%, are expected to follow along the path of the FED reduction.
• The withholding tax (WHT) rate on the mobile sector was also reduced from 14% to 12.5%, while it has been abolished for Mobile Financial Services.
• In a more debatable move, the government also rationalised the sales tax on mobile phones. Previously, there were three categories for this tax, feature phones were charged at Pakistani Rupee (PKR) 300, basic smartphones at PKR 1,000 and other smartphones at PKR 1,500. The feature phone and basic smartphone categories have now been merged and are being charged at PKR 650.
Impacts of tax reform
In “Pakistan: A Digital Future”, a GSMA/Deloitte report published in late 2016, it was highlighted that by eliminating the mobile sector specific taxes, Pakistan can reduce economic distortions and unlock potential benefits for society and the economy. In the medium term this approach could also improve total tax revenue collection for the government. An economic model is applied in the report to estimate the impacts of the tax reductions on Pakistan’s economic development. The model estimated the impacts of reducing FED and provincial sales taxes to 17% and withholding tax on mobile services to 12.5%. The impacts were estimated over a four-year period and were based on a comparison to an alternative scenario where no tax reform took place.
Estimated impacts of the announced tax reform:
- Mobile connections would increase by 3.1 million, increasing penetration by around 1.4%
- GDP would increase by US$4.7 billion, or 1.64% of 2016 GDP
- Tax revenues would increase by around US$100 million or 0.54% of taxes paid by mobile operators in 2016
- Investment would increase by US$770 million
- 7,200 new jobs would be created
The changes announced by the Finance Minister are a step in the right direction as illustrated by the estimated sector-specific and macroeconomic impacts above. However, the presence of distortionary, sector-specific taxes remains quite pronounced in Pakistan, highlighting the need for further reform:
- The withholding tax applied to mobile remains the highest across sectors in the economy.
- The sales taxes applied to handsets make them less affordable for the poorest citizens.
- A particularly regressive PKR 250 sales tax on new SIM cards remains, further exacerbating the affordability barrier for users of mobile services.
 Source: GSMA Intelligence.