Amid a challenging operational environment, including forex and inflationary headwinds, policymakers should consider the measures including reviewing and freezing 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, remove sales tax on affordable mobile phones, and spur long-term planning for the telecom sector.
This has been stated in the GSMA report “Realising Pakistan’s Aspiration to become a Digital Nation,” launched at its Digital Nation Summit Islamabad” which added that taxes on service providers, consumer devices, and services in Pakistan are among the highest in the world.
According to the report Pakistan is poised to unlock its economic potential through accelerated digital transformation. The report underscores the country’s significant strides in mobile connectivity and smartphone adoption while outlining a clear path to maximize these gains for the benefit of its citizens. However, achieving these aspirations will require concrete action and reforms.
The report noted that 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 percent Advance Income Tax (AIT or withholding tax) on essential telecoms services and the 19.5 percent sales tax on mobile services, which create additional barriers to digital inclusion for low-income households. 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, it is 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
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 has 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 lowers 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.
Adopt a framework for financing smartphones for all – Smartphone uptake across and within regions and markets is uneven, which risks leaving large population groups without the means to get online. 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, 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 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.
Consider the impact of service restrictions order – Service restrictions order (SRO) has a negative impact on citizens and businesses in Pakistan. The imposition of these restrictions violates individuals’ rights, as outlined in international human rights conventions, including those integral to democratic processes and elections such as freedom of expression, access to information and privacy. Prolonged restrictions can also have far-reaching negative effects on citizens’ health, education social and economic welfare, and damage trust. In addition to the harm imposed on businesses, restrictions can disrupt credit and investment plans, damaging the country’s reputation for managing the economy and foreign investment.
The government should instead support initiatives like “Always-on Network Service”(AONS), which enables accessibility for business-critical mobile applications such as financial and payment applications and emergency services in data-restricted geographical areas. This initiative, which was developed by GSMA and mobile operators in Pakistan, has undergone several successful trials in controlled settings for regulatory authorities.
Recently, Jazz demonstrated the AONS project during a network shutdown for Moharram. Even with voice and data services blocked, JazzCash continued to operate, enabling over 5,000 users to complete transactions.