The telecommunication industry is growing at a breakneck speed with leading players lapping up mobile subscribers by millions month on month. The country's telecom market is the 4th largest in the world in terms of wireless subscribers and 5th largest in terms of total telecom subscribers (Source: Bharti Airtel [Get Quote] presentation).

After growing its wireless (GSM and CDMA) subscriber base to over 200 m by the end of December 2007, the country is expected to take the number to 500 m telecom subscribers by the end of March 2010.

This growth is likely to be aided by the availability of cheaper handsets, focus of regulatory measures to take telephony to rural markets, lower tariffs and general buoyancy in the economy.

Industry wish list

COAI -- Cellular Operators Association of India

• The revenue share license fee should be reduced to 6% as is applicable in the case of NLD/ILD license. Since the revenues to the government are protected because of increase in revenues of the telecom sector, even this levy of 6% should be progressively brought down in the coming years.
• Multiple levies imposed on the sector should be replaced with simple investor friendly and industry friendly tax structure. Some recommendations with respect to various taxes are as hereunder:

               a. TDS should not be applicable on interconnect charges paid by companies and necessary clarification / notification should be issued in this matter.
               b. Tax holiday benefits in case of mergers/ amalgamations should be continued.
               c. Section 80--IA benefits should be available to companies undergoing amalgamation or demerger after 31st March 2007.
               d. The period during which 80-IA can be claimed by the telecom operators should be extended to 20 years in place of existing 15 years; 100% exemption for successive 10 years out of the 20 years.
               e. Fringe Benefit Tax should not be applicable on ESOPs. Reduce FBT from 20% to 5% on boarding & lodging in consonance with other service industry.

• Accelerated depreciation benefits should be further extended to new plant & machinery capitalised by assessees engaged in providing telecom services and either setting up a new undertaking on or after April 1st 2002 or undertaking existing prior to April 1st 2002 and achieving substantial expansion during any year.

Budget over the years

Budget 2005-06

• Bharat Nirman Project to give telephone connectivity to the remaining 66,822 villages through BSNL.
• A provision of Rs 12 billion for USO Fund in FY06 for telecom.
• Mobile telephone removed from the 1/6 criterion for filing income-tax returns.
• Custom duty on copper reduced from 15% to 10%.
• Custom duty and CVD exemption on parts, components and accessories of mobile handsets including cellular phones continued.
• Customs duty exemption for specified telecom network equipment and parts thereof, if imported by TSPs, extended beyond March 2005 without any specified time limit.
• Custom duty on optical fibres and optical fibre cables reduced from 20% to 10%.

Budget 2006-07

• Estimated outlay for Jawaharlal Nehru National Urban Renewal Mission to be Rs 62.5 billion during 2006-07, including a grant component of Rs 45.9 bn. Through this mission, the government intends to promote establishment of new towns, preferably focused on a specific industry (IT) or a specific theme (education or health).
• Telecommunication to reach 250 m connections by December 2007.
• Provision of Rs 15 billion for Universal Services Obligation Fund in 2006-07
• More than 50 m rural connections to be rolled out in the next three years.
• Peak rate of customs duty on non-agricultural products has been reduced from 15% to12.5% with a few exceptions.
• The rate of service tax is being raised from 10% to 12%.

Budget 2007-08

• Developers and suppliers of content for use in telecom to be brought under the purview of service tax.
• Department of Telecommunication asked to constitute a committee to study the present structure of levies and make suitable recommendations to the government with regards to the applicability of a unified and single levy on the revenue.
• Nil additional duty of customs, on parts, components and accessories of mobile handsets including cell phones, being extended upto 30th June 2009.
• Hike in dividend distribution tax from 12.5% to 15% on dividends distributed by the companies.
• Additional cess of 1% on all taxes to fund secondary education and higher education.

Key positives

Connecting India: The telecom sector has been one of the fastest growing sectors in the Indian economy in the last 4 years. This has been witnessed due to strong competition that has brought down tariffs as well as simplification of policy environment that has promoted healthy competition among various players.

Due to this reason, telecom density in the country has risen to nearly 20% at the end of January 2008, from 3.5% in January 2001.

It's ringing mobile: The Indian mobile sector has been growing rapidly and has emerged as the fastest growing market in the whole world. Currently of a size of over 200 m subscribers (GSM plus CDMA), this sector is expected to reach a size of nearly 500 m subscribers by the year 2010. The increasing monthly addition to the subscriber base (currently at around 7 to 8 m) is indicative of the same.

Broadband push: The government is expected to increase its thrust on the use of Internet. This will come about as PC penetration increases. We expect to see some positive measures being initiated to increase broadband usage in the country.

Key negatives

Spectrum woes: The telecom sector continues to expand at a rapid pace adding coverage and increasing teledensity as more and more people get connected. However, as subscriber base continues to swell and the need for wireless data transfers over mobile grows, the operators are likely to face increased shortage of spectrum availability (as they are facing now). This problem is especially acute in urban areas, which have got higher teledensity.

Highly taxed sector: The COAI (Cellular Operators Association of India) has indicated that the telecom sector, especially the cellular services segment, continues to pay very high duties and levies.

Currently, the sector is paying duties and levies under various heads including annual license fees, spectrum charges and access deficit charge (this has been partly reduces of late). In addition to the above, significant levies are also imposed on the industry on account of sales tax, service tax and import duties on handsets and other telecom hardware.

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