ADB recommends 5pc GST on digital transactions in Pakistan

The Asian Development Bank (ADB) has recommended that Pakistan implement a uniform 5% general sales tax (GST) on all digital transactions to promote the growth of digital payments, enhance e-commerce platforms, reduce inefficiencies tied to cash-based transactions, and support economic documentation.

In its newly released report titled “Pakistan’s Digital Ecosystem”, the ADB cautioned that the current structure of heavy and fragmented taxation on digital infrastructure is impeding foreign investment and hindering the development of the country’s digital services sector.

“Pakistan’s digital infrastructure faces a major challenge from high taxation. Federal and provincial taxes on this sector are among the highest both regionally and globally, and the tax policies remain largely inconsistent,” the report states.

The ADB further observed that these costs widen the digital divide, disproportionately affecting women and marginalized communities who already face significant financial and societal obstacles to internet access.

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The telecom sector, once a promising driver of growth, is now witnessing a decline in revenue and foreign investment due to the increasingly unfavorable business environment, the report noted.

To reverse this trend, the ADB advised the government to re-engage with investors and industry stakeholders, offering them meaningful incentives and regulatory facilitation to encourage fresh investment in digital infrastructure.

Among its key recommendations, the ADB proposed that all direct and indirect taxes on digital infrastructure should be rationalized and aligned with global benchmarks. Additionally, the Bank urged authorities to fix tax rates for the sector for a minimum of 10 years to provide fiscal predictability for investors.

Currently, Pakistan's broadband penetration stands at 56.5%, with 137 million internet subscriptions. However, each province imposes a regressive 19.5% sales tax on internet usage—one of the highest rates for any service.

The report also flagged high capital investment costs, regulatory bottlenecks, complicated right-of-way (RoW) policies, and unpredictable tax regimes as major deterrents to new investment in Pakistan’s digital ecosystem.