High smartphone taxes leave Pakistan with 52% internet usage gap despite 81% network coverage

Pakistan’s high taxes on smartphones and telecom services are widening the country’s digital divide, with only 29% of the population using the internet despite 81% living in areas covered by 3G and 4G networks, leaving a 52% usage gap largely driven by affordability constraints rather than infrastructure shortages, according to a report released by the Policy Research Institute of Market Economy.

The report, titled Taxing Connectivity: How Taxes and Tariffs Deepen Pakistan’s Digital Divide, said Pakistan’s tax structure treats digital connectivity as a revenue source rather than essential economic infrastructure, limiting access to education, online work and digital services.

The report stated that Pakistan imposes one of the highest tax burdens on telecom services and mobile devices in the region through a combination of regulatory duties, sales tax, withholding tax and advance income tax.

Devices priced above $500 are subject to a higher 25% sales tax, while premium smartphones can face an effective tax burden exceeding 50%.

The study estimated that a smartphone priced internationally at $700 ultimately costs Pakistani consumers around ₨294,500 after taxes and duties, with total taxes amounting to approximately ₨98,500.

According to the report, the taxation structure has also encouraged expansion of the grey market for smuggled and patched mobile phones.

The report referred to illegal modification of devices to bypass the Pakistan Telecommunication Authority’s Device Identification, Registration and Blocking System.

Industry estimates cited in the report showed that the PTA blocked nearly 100 million illegal mobile devices during fiscal year 2024-25, including millions carrying cloned or duplicate IMEI numbers.

The study also reviewed Pakistan’s Mobile Device Manufacturing Policy 2020 and questioned its effectiveness in promoting localisation.

While Pakistan now assembles more than 30 million mobile phones annually through over 30 assembly units, the report said localisation remains below 10% against the policy target of 49%.

Most manufacturers continue relying on imported completely knocked down kits instead of producing higher-value components locally, according to the study.

The report argued that although imports of finished mobile phones declined after introduction of the policy, Pakistan’s foreign exchange burden remained high because manufacturers still depend heavily on imported parts.

Using Household Integrated Economic Survey 2024-25 data, the study estimated that an entry-level smartphone costing around ₨25,000 consumes nearly 62% of monthly expenditure of the poorest households.

The report said the average affordability ratio nationally stood at 31%, indicating continued pressure even on middle-income households.

It further noted that expensive digital access disproportionately affects women, students, freelancers and gig economy workers.

Pakistan currently has more than 1.5 million freelancers whose work depends on affordable smartphones and internet connectivity, according to the report.

The study recommended harmonising sales tax on mobile phones at 18%, removing higher tax slabs on expensive devices and lowering taxes on telecom services.

It also called on policymakers to treat digital connectivity as essential national infrastructure rather than solely as a source of tax revenue.