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The Asian Development Bank (ADB) has advised Pakistan to implement a uniform 5 per cent general sales tax (GST) for all digital transactions to encourage nationwide adoption of e-commerce platforms, reduce cash-related inefficiencies and document the economy.
In its latest report on Pakistan’s Digital Ecosystem issued yesterday, the ADB cautioned that steep and inconsistent taxes on digital infrastructure in the country pose a serious risk to foreign investment, growth, and the expansion of digital services.
“Pakistan’s digital infrastructure faces a major challenge from high taxation. Taxes on this sector, both federal and provincial, are some of the highest globally and regionally, and the tax policies tend not to be very consistent,” the report said.
“The cost of service provision exacerbates the digital divide, especially for women and marginalised groups, who face asymmetric cost and cultural barriers to accessing the internet.”
The report further added that the telecom sector in Pakistan “experienced a decline in revenues and foreign investment, which reflects a very challenging business environment”.
It called for a “renewed focus is needed by the government on engaging with investors and industry stakeholders to address their concerns and provide incentives and facilitation to invest and operate in the country”.
In its recommendations on the digital economy, the report also advised to cut corporate income tax rates and the cost of doing business for SMEs by 10pc for the next 10 years, conditional on the businesses registering themselves and using digital platforms for their transactions.
Other recommendations included simplifying taxation and foreign exchange regimes for ICT export companies; capping income tax for staff of ICT-export companies to 15pc; tax credits for women-led digital businesses; single window regulation; providing low-interest loans; and mandating through the State Bank of Pakistan that commercial banks allocate at least 15pc of their loan portfolios to SMEs with a minimum of 50pc emphasis on digital and ICT businesses.
The ADB urged the government to “rationalise all digital infrastructure taxes, both direct and indirect, making them competitive against a basket of countries, and fix sector tax rates for at least 10 years”.
Pakistan currently has 56.5pc broadband penetration with 137 million subscriptions. Every province charges a regressive sales tax of 19.5pc on internet service usage which is higher than any other service, ADB added.
“High capital investment; regulatory obstacles; costly and cumbersome Right of Way (RoW) arrangements; and high, unpredictable taxes hinder new investments in Pakistan’s digital infrastructure,” the report stated.
Pakistan has the world’s lowest average revenue per user due to fierce competition among service providers, the report noted, adding that revenues of operators and telecom companies have been “shrinking” in real terms.
It recommended mandating a flat countrywide optimal RoW fee per meter — permission granted to telecom companies to install and maintain their infrastructure (like fiber optic cables, mobile towers, etc) — and provide for a predictable rise over a longer period.
It also recommended prioritising early-stage investments in digital infrastructure projects, promote local manufacturing of smartphones, and provide 3pc research and development allowance on exports of locally produced smartphones.
The ADB advised the government to create a “robust enabling legal and regulatory framework for development and implementation of public–private partnerships (PPPs) for digital infrastructure”.
It also called for expanding internet access and device ownership for citizens, especially women, working with local and global partners to design tailored PPP programmes, and providing low-cost or easy installment-based smartphones.
