Taxation of Telecommunication Services in Pakistan

Telecommunication services are a critical pillar of Pakistan’s economy, connecting millions through voice, data, and digital communication. This sector, comprising mobile operators, internet service providers (ISPs), fixed-line providers, and telecommunication infrastructure firms, is among the highest-taxed in Pakistan. Governed by both federal and provincial tax laws, the sector faces a complex matrix of sales tax, income tax, withholding tax, and regulatory levies. This article provides a comprehensive guide to the taxation of telecommunication services in Pakistan, including applicable laws, tax rates, filing requirements, exemptions, and compliance issues.

1. Definition of Telecommunication Services

As per Pakistan’s tax laws and the Pakistan Telecommunication (Re-Organization) Act, 1996, telecommunication services include:

• Voice calling (mobile and landline)

• SMS and messaging services

• Mobile internet and broadband

• International roaming

• TV/Internet/VoIP calling

• Leased lines and MPLS networks

• Hosting and bandwidth services

• Infrastructure sharing and telecom towers

• Value-added services (VAS) like ringtones, games, etc.

These services are provided by licensed operators including mobile network operators (MNOs), ISPs, LDIs, LL operators, and digital solution providers.

2. Tax Authorities and Regulatory Bodies Involved

Telecom operators must comply with tax regulations from both federal and provincial authorities:

• Federal Board of Revenue (FBR) – Income tax, FED, and withholding

• Provincial Revenue Authorities – Sales tax on services

  • Punjab Revenue Authority (PRA)

  • Sindh Revenue Board (SRB)

  • Khyber Pakhtunkhwa Revenue Authority (KPRA)

  • Balochistan Revenue Authority (BRA)

• Pakistan Telecommunication Authority (PTA) – Licensing and telecom regulations

• State Bank of Pakistan (SBP) – For foreign remittances and repatriation

3. Income Tax on Telecommunication Services

a. Applicable Income Tax Rates

Telecom service providers are subject to the Income Tax Ordinance, 2001. Most operate as Private Limited or Public Limited companies, subject to:

• 29% corporate tax rate

• 20% if classified as a small company under Section 2(59A)

b. Minimum Tax Under Section 113

In addition to normal tax, telecom companies must pay minimum tax on turnover if no taxable profit is declared.

This tax acts as a floor even when the company is loss-making.

c. Withholding Tax Deduction from Consumers

Telecom companies must deduct advance income tax from mobile subscribers under Section 236.

• 12.5% advance tax is deducted on:

  • Prepaid recharge cards

  • Mobile top-ups and balance loads

  • Postpaid bills

This amount is adjustable in the annual tax return of the subscriber.

d. Filing Requirements

• Annual income tax return via FBR’s IRIS portal

• Monthly and quarterly withholding tax statements (Section 165)

• Audit reports and reconciliation statements for FBR reviews

4. Sales Tax and FED on Telecom Services

Telecom services are subject to sales tax or Federal Excise Duty (FED) depending on the service and the location of the user.

a. Federal Excise Duty (FED)

Under the Federal Excise Act, 2005, the federal government charges:

• 19.5% FED on telecommunication services in ICT and unregulated territories

• Deducted on:

  • Voice calls

  • SMS

  • Internet usage in non-provincial areas

b. Provincial Sales Tax

Telecom services are taxed by the provinces when the recipient is located in:

Tax is applied on:

• Voice and SMS usage

• Mobile internet and data packages

• VAS and digital content

Note: Telecom companies must determine tax jurisdiction based on SIM origin or user location, not just business location.

c. Double Taxation & Adjustments

Due to jurisdictional overlaps, telecom firms often deal with:

• Double taxation disputes

• Disallowed input tax credits across provinces

• FED vs. Sales Tax classification conflicts

These require advance rulings, litigation, or apportionment under tax law.

5. Withholding Tax Obligations

Telecom companies act as withholding agents and must deduct:

• Advance tax on mobile top-ups (Section 236)

• Withholding on salary (Section 149)

• Withholding on service providers (Section 153)

• Withholding on rent and contracts (Section 155 & 153A)

• Payments to foreign vendors (Section 152) – e.g., Google Cloud, AWS

They must file detailed monthly withholding tax statements and issue tax deduction certificates.

6. Regulatory Levies by PTA

In addition to taxes, telecom operators pay regulatory fees to Pakistan Telecommunication Authority (PTA), including:

• Annual regulatory fee – 0.5% of gross revenue

• Universal Service Fund (USF) contribution – 1.5% of gross revenue

• R&D Fund – 0.5% of gross revenue

• License renewal fee – varies by operator and license type

These are non-tax levies but must be accounted for in compliance reports.

7. Taxation of Internet and Data Services

a. Sales Tax on Internet

Previously, internet usage below a threshold (2 Mbps or Rs. 1,500/month) was exempt. Now, most provinces tax internet services at the full rate:

• Punjab (PRA): 19.5%

• Sindh (SRB): 19.5%

• KP (KPRA): 19.5%

b. Income Tax

Data and internet revenues are included in gross income and taxed at the applicable corporate tax rate.

8. Taxation of Value-Added Services (VAS)

VAS includes:

• Ringtones

• Mobile gaming

• Digital subscriptions

• Caller tunes

• Streaming platforms bundled with telecom services

VAS is subject to sales tax and income tax, and in some cases, entertainment tax or content licensing fees.

If provided by third-party vendors, telecom operators must deduct withholding tax on payments.

9. GST Input Adjustments

Telecom operators are allowed to claim input tax adjustments for:

• Equipment purchases

• Software licenses

• Fuel and utilities for BTS towers

• Vendor services (if from registered suppliers)

However, adjustments may be disallowed if:

• Vendor is not registered

• Service falls under exempt category

• Cross-jurisdictional input is unverified

10. Challenges in Telecom Taxation

• High tax burden (combined tax on recharge: 30%+)

• Complex jurisdictional issues (e.g., user in Punjab, service from Sindh)

• Double taxation of cross-border services

• Difficulty in tracking prepaid vs postpaid tax deductions

• Frequent policy changes and SROs affecting tax treatment

11. Penalties for Non-Compliance

12. International Payments and Tax Treaties

Telecom companies often pay for:

• Satellite services

• Cloud platforms (e.g., AWS, Azure)

• Software licensing (Microsoft, Oracle)

• International SMS routing

These are subject to withholding tax under Section 152, unless exempted under Double Taxation Avoidance Agreements (DTAAs).

13. Taxation of Telecom Infrastructure Providers

Companies that install and manage telecom infrastructure (BTS towers, fiber optic cables, etc.) are taxed like service providers.

• Income tax at normal rates

• Sales tax on rental/maintenance of infrastructure

• Subject to PRA/SRB service tax on leases or tower sharing

14. How Sterling.pk Helps Telecom Operators

At Sterling.pk, we help telecom operators, ISPs, and tech platforms manage:

• Income tax and sales tax registration and returns

• Withholding tax deductions and statements

• GST input reconciliation and adjustments

• FED vs. Sales Tax compliance

• PTA levy audits and advisory

• Litigation and double taxation disputes

We ensure complete compliance while helping reduce the tax burden through efficient planning and advisory.

Conclusion

The taxation of telecommunication services in Pakistan is among the most complex due to multi-layered levies, overlapping jurisdictions, and rapid technological changes. Telecom operators must manage federal taxes (income tax, FED, WHT) and provincial taxes (sales tax on services) while also complying with PTA levies. Effective tax planning, compliance management, and expert advisory are critical for avoiding penalties and maintaining profitability in this highly taxed sector.

At Sterling.pk, our expert consultants specialize in telecom taxation and offer complete tax, audit, and regulatory compliance solutions tailored to your operational model.