Telecom Industry to Government: You Cannot Build a Digital Economy on a 34.5% Tax Rate

Pakistan telecom industry budget recommendations for FY 2026–27 have landed at the Ministry of Information Technology and Telecommunication, and they carry an uncomfortable truth that the government cannot easily dismiss: Pakistan is trying to build a digital economy while taxing telecom services at 34.5 percent, one of the highest rates in the region.

Submitted through the Telecom Operators’ Association, the five-point proposal covers withholding tax reduction, advance income tax cuts for consumers, abolition of customs duties on 5G equipment, dramatic reduction of fibre cable import duties, and removal of a disputed tax authority power that the industry argues stifles investment. Together, they amount to the most comprehensive tax reform ask the telecom sector has made in years, and the numbers behind each demand make the case difficult to argue against.

The Problem in Numbers

Before unpacking the recommendations, the sector context the industry has provided tells a stark story about where Pakistan currently stands on connectivity.

Pakistan’s Connectivity Gap, Current State

These are not aspirational targets that have not yet been reached. They are baseline deficiencies in a country that has been calling itself ‘Digital Pakistan’ for years. More than one in ten Pakistanis cannot access a basic mobile signal. Fixed broadband penetration is below 2 per cent, among the lowest globally. And the consumer tax burden on telecom services is actively suppressing the affordability and adoption that would improve those numbers.

Recommendation 1: Cut Withholding Tax on Telecom Operators

The industry’s first recommendation targets Section 153 of the Income Tax Ordinance, which currently levies a 6 percent withholding tax on telecom operators. The proposal asks for a reduction to 4 percent, alongside a critical structural change: making the tax adjustable rather than treating it as a minimum tax.

Additionally, the industry recommends extending the carry-forward period for turnover tax credits under Section 113 from two years to five years.

The practical impact of the current structure is significant. Treating withholding tax as a minimum tax, regardless of actual profitability, creates cash flow constraints that directly limit how much operators can invest in infrastructure. A telecom company that is investing heavily in network expansion, running losses during the deployment phase, still pays the full withholding tax. The result is a tax regime that penalises precisely the behaviour, capital-intensive infrastructure investment, that the government says it wants to encourage.

Recommendation 2: Halve the Advance Income Tax on Mobile Usage

The second recommendation cuts closer to home for ordinary Pakistanis. Section 236 of the Income Tax Ordinance currently levies a 15 percent advance income tax on telecom services, meaning that for every Rs100 a prepaid mobile user loads onto their account, Rs15 goes to the government before a single call is made or a single MB of data is used.

The industry is asking for that rate to be cut to 8 percent.

This is not just a business concern. A 15 percent upfront tax on mobile usage disproportionately impacts low-income and prepaid consumers, the segment that Pakistan’s digital inclusion agenda most needs to bring online. The industry notes that the ECC had previously reduced this rate before it was increased again through the Supplementary Finance Act 2021. Restoring a lower rate would directly improve mobile service affordability for Pakistan’s most price-sensitive users.

Recommendation 3: Abolish Customs Duties on 5G and Telecom Equipment

Pakistan’s 5G rollout is officially underway; Jazz and Zong have active sites, Ufone has confirmed a commercial launch, and the Telenor-Ufone merger has created a combined entity with the country’s largest 5G spectrum portfolio. But import duties on the equipment required to build 5G networks are adding substantial costs to every tower, every antenna, and every core network component.

The industry is proposing the complete abolition of customs duties on imports of 5G and fixed-line telecom equipment, including network infrastructure, smartphones, servers, batteries, SIM cards, and related components.

The estimated impact: duty rationalisation could unlock approximately PKR 12 billion in additional capital deployment for network expansion and digital infrastructure. That is not a projection based on optimistic assumptions, it is a direct calculation of costs that are currently being absorbed by import duties and could be redirected to actual infrastructure.

Recommendation 4: Slash Fibre Cable Duties From 67% to 5%

This is the recommendation that most starkly illustrates the structural contradiction in Pakistan’s digital economy policy. The government wants to expand fixed broadband. Fixed broadband requires fibre optic cable. Fibre optic cable is subject to combined duties and taxes of approximately 67 percent on import.

The industry is asking for those duties to be reduced to 5 percent.

Fixed broadband penetration in Pakistan is below 2 percent, among the lowest in the world. A significant part of the reason is deployment cost. When more than two-thirds of the cost of fibre cable is tax and duty before a single metre is laid, the economics of broadband expansion, particularly into lower-density and rural areas, are simply unworkable. The proposal to reduce duties to 5 percent would not solve every barrier to fibre rollout, but it would remove the most immediately prohibitive one.

Recommendation 5: Remove Commissioner’s Power to Reject Advance Tax Estimates

The fifth recommendation is more technical but reflects a genuine ease-of-doing-business concern. Under Section 147(6B) of the Income Tax Ordinance, tax commissioners have the authority to reject taxpayers’ advance tax estimates, meaning a company’s own assessment of its tax liability can be overridden by a commissioner, creating disputes, litigation, and compliance uncertainty.

The industry is recommending that this authority be revoked.

The argument is straightforward: unpredictable tax assessments increase litigation costs, create investment uncertainty, and make Pakistan a more difficult environment for long-term capital commitment. Removing this power would strengthen taxpayer confidence and reduce administrative burden on both businesses and tax authorities.

The Underlying Message

Read together, these five recommendations are not simply a tax wish list. They are a coherent argument about why Pakistan’s telecom sector is underperforming relative to its potential and what specific fiscal changes would unlock the investment needed to change that.

The industry is making a case that is grounded in data. More than 30 percent of Pakistanis lack 4G coverage. Twelve percent have no mobile signal at all. Fixed broadband penetration is negligible. Consumer taxes are among the region’s highest. And studies consistently show that a 10 percent increase in broadband penetration translates to approximately 2 percent increase in GDP per capita.

Pakistan has the infrastructure ambition, 5G licences issued, merger approved, and satellite services in progress. What it lacks is a fiscal environment that makes the investment required to realise that ambition commercially viable.

The budget is the opportunity to change that. Whether the government takes it is the question the telecom sector is waiting to have answered.