Pakistan’s heavy smartphone taxes widen digital divide: PRIME report

Pakistan’s ambitious push toward a digital economy is being undermined by a tax regime that treats smartphones and internet access as luxury commodities,

Pakistan’s ambitious push toward a digital economy is being undermined by a tax regime that treats smartphones and internet access as luxury commodities, according to a new policy report that warns the country’s current approach is deepening inequality and restricting economic participation.

A study released by the Policy Research Institute of Market Economy (PRIME), titled “Taxing Connectivity: How Taxes and Tariffs Deepen Pakistan’s Digital Divide,” argues that excessive taxation on mobile devices and telecom services is creating a major barrier to digital inclusion at a time when online access has become essential for education, employment, banking and entrepreneurship.

The report highlighted what it described as a “governance paradox,” where the government is simultaneously promoting digitalisation while imposing some of the region’s heaviest taxes on the very tools needed to participate in the digital economy.

According to the study, nearly 81% of Pakistan’s population lives in areas covered by 3G and 4G networks, yet only 29% of citizens actively use the internet. The remaining 52% gap, the report noted, is not primarily caused by infrastructure shortages but by the high cost of digital access.

Researchers argued that smartphones and internet connectivity should now be viewed as critical economic infrastructure rather than discretionary consumer products. However, the country’s taxation framework continues to rely heavily on the telecom sector for revenue collection.

The report detailed how imported smartphones are subject to multiple taxes and duties, including regulatory duties, advance income tax, withholding tax and sales tax. Devices priced above $500 face a higher 25% sales tax rate, while premium phones can carry an effective tax burden exceeding 50%.

As a result, consumers end up paying significantly inflated prices for mobile devices. PRIME estimated that a smartphone with an international market value of $700 ultimately costs Pakistani buyers around Rs294,500 after taxes and duties, including nearly Rs98,500 in tax-related charges alone.

The study warned that such high taxation has unintentionally encouraged the expansion of Pakistan’s grey mobile phone market. Smuggled and illegally patched phones are increasingly being sold to avoid official registration costs and taxes.

The report pointed to widespread misuse of the Device Identification, Registration and Blocking System (DIRBS), introduced by the Pakistan Telecommunication Authority (PTA) to curb illegal devices. According to industry estimates cited in the study, the PTA blocked nearly 100 million illegal mobile devices during fiscal year 2024-25, including millions operating with cloned or duplicate IMEI numbers.

The report also examined the performance of Pakistan’s Mobile Device Manufacturing Policy (MDMP) 2020, which was designed to encourage domestic mobile phone production and reduce reliance on imports.

While local assembly has expanded rapidly in recent years, researchers argued that true industrial localisation remains weak. Pakistan currently assembles more than 30 million mobile phones annually through over 30 assembly facilities, but localisation levels reportedly remain below 10%, far short of the policy’s original 49% target.

Most manufacturers continue to depend heavily on imported completely knocked down (CKD) kits rather than producing high-value components domestically, the report stated. As a result, the expected reduction in foreign exchange pressure has not materialised because the sector still relies extensively on imported parts and inputs.

Beyond the industrial impact, the report stressed the growing social cost of unaffordable digital access in a country where online work, digital payments and app-based services are expanding rapidly.

Using data from the Household Integrated Economic Survey (HIES) 2024-25, the study estimated that an entry-level smartphone costing approximately Rs25,000 consumes nearly 62% of the monthly spending capacity of the country’s poorest households.

Even middle-income families face affordability challenges, with the national average affordability ratio standing at 31%, according to the findings.

The report warned that high digital costs disproportionately affect women, students, freelancers and gig economy workers. Pakistan’s freelance sector, now estimated at more than 1.5 million workers, depends heavily on affordable smartphones and reliable internet access for participation in global digital markets.

Researchers also noted that women with mobile phone access are significantly more likely to join the labour force, making affordable connectivity increasingly important for economic inclusion and social mobility.

To address the issue, the report recommended a broad restructuring of Pakistan’s digital taxation framework. Suggestions included harmonising sales tax on mobile devices at 18%, eliminating punitive tax slabs on premium smartphones and reducing taxes on telecom services.