The Auditor General of Pakistan has identified a major financial lapse involving the Universal Service Fund (USF) Company, which failed to deduct provincial sales tax worth Rs. 2.36 billion. The company, operating under the Ministry of Information Technology and Telecommunication (MoITT), was found non-compliant with provincial tax laws during a recent audit.
The observation was made under Section 10 of the Punjab Sales Tax on Services Ordinance 2012 and Section 9 of the Khyber Pakhtunkhwa Sales Tax Act 2022, both of which require that tax on taxable services be charged, collected, and deposited at the prescribed rates.
Projects and Payment Details
The Universal Service Fund Company had awarded multiple contracts to telecom operators as part of its mission to expand broadband and telecom access in unserved and underserved regions of Pakistan. Payments totaling Rs. 15.68 billion were made under the head of capital expenditure, including Rs. 5.97 billion for completed projects and Rs. 9.71 billion for ongoing ones.
However, the audit found that the company did not deduct sales tax on services amounting to Rs. 2.36 billion from the telecom operators. Furthermore, the operators themselves failed to provide any proof of having paid the required tax during the fiscal year 2023–24.
Weak Oversight and Financial Control
According to the Auditor General of Pakistan, this failure reflects weak financial oversight and non-compliance with provincial tax regulations. The report emphasized that such negligence could lead to potential revenue losses for provincial tax authorities, including the Punjab Revenue Authority (PRA) and the Khyber Pakhtunkhwa Revenue Authority (KPRA).
The auditors stated that it was the responsibility of the Universal Service Fund Company to ensure that tax deductions were made and verified according to law. By failing to confirm the payment of taxes, the company exposed itself to compliance risks and potential financial liabilities.
USF’s Response and Audit Rejection
In response to the audit observations, the management of USF Company argued that the payments in question were subsidy grants aimed at infrastructure development and therefore not taxable services. They added that telecom companies are registered taxpayers who had not issued any sales tax invoices, which, according to them, meant no tax was applicable.
The Auditor General of Pakistan rejected this explanation, asserting that the company still had a legal obligation to verify whether the telecom operators had fulfilled their tax responsibilities. The audit team maintained that the lack of verification and documentation posed a serious risk of non-compliance and possible revenue leakage for the government.
Committee Review and Audit Disagreement
The matter was presented to the Departmental Accounts Committee (DAC) during its meeting on December 12, 2024. The committee accepted USF’s explanation and marked the issue as settled. However, the Auditor General of Pakistan disagreed with this decision, recommending that the case be forwarded to the Federal Board of Revenue (FBR) and the respective provincial tax authorities for a final determination of the tax liability.
The audit authorities emphasized that only the FBR and provincial revenue bodies have the mandate to decide whether the payments qualify as taxable services under existing tax laws.
Broader Implications for the IT and Telecom Sector
The findings highlight the importance of robust financial management and stronger tax compliance within Pakistan’s telecom and IT sectors. The Auditor General of Pakistan noted that public sector organizations handling large-scale funds must maintain strict adherence to tax regulations to ensure transparency and accountability.
The Universal Service Fund Company plays a crucial role in expanding digital connectivity across Pakistan, especially in remote regions. However, lapses in tax compliance could not only harm its reputation but also hinder the progress of future projects aimed at bridging the digital divide.
The Auditor General of Pakistan’s report on the Rs. 2.36 billion sales tax lapse by the Universal Service Fund underscores ongoing challenges in fiscal discipline and regulatory enforcement. While the USF maintains that its payments were non-taxable subsidies, the audit findings point to clear non-compliance with provincial tax laws.
For Pakistan’s growing digital and telecom ecosystem, ensuring tax transparency and coordination among the FBR, provincial tax authorities, and the Ministry of IT is essential. Strengthening financial controls and enforcing accountability will help prevent similar oversights in the future and safeguard public funds.
