Phone costs lock 52% out of internet

Pakistan is facing a governance paradox: taxing smartphones like luxury products while simultaneously pursuing an ambitious digitalisation agenda. This contradiction is widening the country's digital divide and limiting access to education, employment and online business opportunities, according to a new policy report.

The report, titled "Taxing Connectivity: How Taxes and Tariffs Deepen Pakistan's Digital Divide", published by the Policy Research Institute of Market Economy (PRIME), argues that high taxes on mobile phones and telecom services are undermining the government's own digital economy objectives.

The study noted that despite 81% of Pakistan's population living in areas covered by 3G and 4G services, only 29% of people use the internet, leaving a massive 52% usage gap largely driven by affordability issues rather than lack of infrastructure.

"Digital connectivity is no longer a discretionary consumer good; it is a core economic infrastructure," the report stated, warning that Pakistan's fiscal policies continue to treat smartphones and internet access as revenue?generating tools instead of essential economic enablers.

According to the report, Pakistan imposes one of the heaviest tax burdens on the telecom sector in the region. Multiple levies on devices and internet services significantly increase the cost of digital access for consumers. Imported smartphones face a combination of regulatory duties, advance income tax, withholding taxes and sales taxes. Devices priced above $500 are subject to a higher 25% sales tax, while premium phones can face an effective tax burden exceeding 50%.

The report estimated that a $700 smartphone eventually costs consumers about Rs294,500 after taxes and duties, with total taxes amounting to Rs98,500.

The study argued that this steep taxation structure has distorted the market and fuelled a growing grey economy centred around smuggled and patched mobile phones."High?end phones are routinely sold in the grey market after being patched to fool the Device Identification, Registration and Blocking System (DIRBS)," the report noted, referring to the system introduced by the Pakistan Telecommunication Authority (PTA). The report cited industry estimates showing that the PTA blocked nearly 100 million illegal mobile devices during fiscal year 2024?25, including millions with cloned or duplicate IMEIs.

The study also questioned the effectiveness of Pakistan's Mobile Device Manufacturing Policy (MDMP) 2020, introduced to encourage local manufacturing and reduce import dependence. While local assembly has expanded sharply, the report argued that genuine localisation remains extremely limited. Pakistan now locally assembles more than 30 million mobile phones annually, with over 30 companies operating assembly units. However, the report said localisation remains below 10% against the policy target of 49%.

Most manufacturers continue importing completely knocked down (CKD) kits instead of producing high?value components domestically."The policy successfully discouraged imports of finished phones but failed to induce domestic production of complex components," the report said. It added that despite the shift from finished phone imports to CKD kit imports, Pakistan's foreign exchange burden has not declined meaningfully because the industry still relies heavily on imported parts.

The report further highlighted the social and economic consequences of expensive smartphones in a country with rising reliance on digital work and online services. Using Household Integrated Economic Survey (HIES) 2024?25 data, the report estimated that an entry?level smartphone costing about Rs25,000 consumes nearly 62% of the monthly expenditure of the poorest households. Even middle?income households face significant affordability pressures, with the average affordability ratio standing at 31% nationally.

The report warned that expensive digital access is particularly hurting women, students, freelancers and gig workers. Pakistan currently has more than 1.5 million freelancers and a rapidly expanding app?based economy dependent on affordable internet access and smartphones. The study noted that women with access to mobile phones are significantly more likely to participate in the labour force, making digital access increasingly linked to economic inclusion.

The report recommended harmonising sales tax on mobile phones at 18%, removing punitive tax slabs on high?end devices and reducing taxes on telecom services. It also called for treating digital connectivity as essential national infrastructure rather than a narrow fiscal instrument aimed primarily at revenue generation.