Budget 2005-06: Telecom
The cellular telephony segment has emerged as the fastest growing segment in the Indian telecom industry. In fact, the segment achieved a landmark in FY03 when, for the first time, more cellular subscribers were added than fixed line subscribers. A slew of tariff reduction in the past 2 years has helped the segment to gain in popularity. The cellular segment is playing an important role in the industry by making itself available in the rural and semi urban areas where tele-densities are the lowest and where fixed line services will take some time to penetrate deep because of high capital investments required to build a network. 

Budget Measures Bharat Nirman Project - To give telephone connectivity to the remaining 66,822 villages through BSNL. A provision of Rs 1200 crore (Rs 12 billion) for USO Fund in FY06 for telecom. Mobile telephone to be removed from the 1/6 criterion for filing income-tax returns. Custom duty on copper is being reduced from 15 per cent to 10 per cent. Present custom duty and CVD exemption on parts, components and accessories of mobile handsets including cellular phones to be continued. Customs duty exemption for specified telecom network equipment and parts thereof, if imported by TSPs, is being extended beyond March 2005 without any specified time limit. Custom duty on optical fibres and optical fibre cables is being reduced from 20 per cent to 10 per cent.  Budget Impact The lowering of customs duty on optical fibre cables will benefit national long distance telephony service providers significantly considering the expansion plans from the long-term perspective. Increased provision for the USO fund to bolster penetration of telephony into the rural areas. Extension in custom duty exemptions for imported telecom network equipments beyond March 2005 to boost a less costly technology transfer for service providers Reduction in custom duty on copper to help basic service providers. Removal of mobile telephones for the 1/6 list to remove the 'premium' tag on the service and encourage the use of service by the common man, thus benefiting cellular service providers.  Sector Outlook The government has a vision of providing 250 million phones, 18 m Internet connections and 10 million broadband connections by year 2007. This would involve a huge investment. Post the hike in foreign investment (FII and FDI) limit from 49 per cent to 74 per cent and now the extension in custom duty exemptions for imported telecom network equipments beyond March 2005, we are very optimistic about the prospects of the telecom sector. Higher FDI will enable a greater degree of technology transfer, which will help telecom companies to expand their operations in the country at a faster rate. However, telecom continues to be one of the highly taxed sectors in the country and until there is rationalisation on this front, we may not be able to see telecom companies exploiting the full potential of the Indian telecom sector. In the long-term, we continue to remain optimistic about the prospects of the sector.  Industry Wish List Wish list (Cellular Operators' Association of India) The period during which tax deduction under Section 80IA can be claimed by telecom operators should be extended to 20 years from the existing 15 years, including 100 per cent exemption for successive 10 years out of the 20 years Cellular phones and services should be excluded from the 1/6 scheme of Income Tax. Application of Minimum Alternate Tax (MAT) under Section 115JA Benefits of Section 79 regarding Mergers and Acquisitions As most of the telecom equipments are not manufactured in India, the customs duty should be reduced to 0 per cent (Basic, CVD and SAD) Duties on GSM handsets/ mobile phones should be reduced to 0 per cent and sales tax be rationalised to 4 per cent. Definition of AGR (adjusted gross revenues) should be based solely on service related revenues and all non-service related revenue streams (interest income, dividend income etc.) should be excluded.  Budget over the years Budget 2002-03 Budget 2003-04 Budget 2004-05 Increase in basic customs duty and removal of the 16 per cent counter veiling duty on cellular handsets. Foreign direct investment limit on telecom companies raised to 74 per cent from 49 per cent earlier. Reduction in customs duty on capital goods for the telecom sector from 25 per cent to 15 per cent. Continuation in tax holiday for infrastructure related sectors. Customs duty on optical fibre cable reduced from 25 per cent to 20 per cent  FDI limit in the sector increased to 74 per cent from 49 per cent. Customs duty exemption on mobile switching centers imported by telecom service providers now extended to universal access service providers. Service tax increased to 10 per cent from 8 per cent. 2 per cent education cess on direct and indirect tax.

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