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The penetration levels in rural and semi urban areas can be significantly enhanced, and government can help in this mission through reduction and rationalization of levies.
Current status
The telecom sector has been one of the fastest growing sectors in India, which also boasts of having the second largest telecom user - base in the world. Since January 2009, India has been adding more than 11 million wireless subscribers on a continuous basis and even added more than 15 million subscribers in January and March 2009.
With overall teledensity being at 38.88% at the end of May'09, the total number of telephone connections stood 452.91 million at the end of May 2009. The total wireless subscribers (GSM, CDMA & WLL (F)) base stood at 415.25 million at the end of May 2009 and in the wire line segment, the subscriber base stood at 37.66 million, though at a declining spree.
The Indian telecom sector is at a critical point as net adds are approaching peak while the competition is intensifying. The competition is to be intensified further with many new entrants waiting in line to launch their services. The tariffs in the industry are at their historical lows and also lowest in the world.
With more launches and mobile number portability in waiting, competition will intensify further. Tata Teleservices (TTSL) has announced the launch of its GSM services, Tata DoCoMo by end-June, starting with South India and then in West and North. Rcom has already successfully launched its GSM services. MTS (earlier Shyam-Sistema) launched its CDMA services in Tamil Nadu and Kerala in April'09 and in Chennai in May'09.
Industry expectations
1) General
Rationalisation of levies
Currently, telecom industry is subject to service tax, license fees including universal service obligation fees, spectrum charges. Besides, the states levy additional taxes such as Octroi, VAT, stamp duty, entry tax and levies on towers. The total of all the above levies on telecom industry works out to around as high as 24% to 32% of their total revenues, which is one of the highest in the world. Telecom Industry in other developing countries like Malaysia, Sri Lanka and Pakistan pay less than 7% and in China it is around 3%.
COAI (Cellular Operators Association of India), sought a reduction and rationalization of the various duties and levies imposed on telecom at Central as well as State level, in order to simplify the regime and enable a reduction in the cost of services.
2) Indirect Taxes
a) Levy on Handsets
In the Union Budget of 2008 -2009 National Calamity Contingent Duty (NCCD) of 1% has been imposed on mobile phones. On imported mobile phones, this duty shall be levied as additional duty of customs (SAD). This duty will not only increase the prices of handsets, but will also lead to lot of administrative work and burden.
The industry estimates that this additional levy will go against the key objective of the Government, which has been to ensure fast, spread of affordable connectivity to the rural areas and will only increase the entry barrier for low end customers.
So as to ensure speedy spread of service, especially to the rural areas, the duty which has been imposed on handsets (NCCD & SAD) on mobile handsets should be withdrawn. Further, the additional duty on mobile handsets should be reduced to NIL.
b) Levy of 4% Additional Duty of Customs (SAD)
The Indian Government has fulfilled its commitments to the WTO by bringing down the basic customs duty (BCD) on IT/ Telecom products to zero. Pursuant to this, the Union Budget 2005-06 had exempted customs duty on specified items covered under the Information Technology Agreement (ITA).
However, to compensate for the internal taxes like sales tax, proposed State VAT, central sales tax, which apply to sale, purchase or transportation of goods in India, an additional duty of customs (SAD) of 4% has been levied on ITA bound items which includes telecom equipment like MSC, BTS/ BSC, HDSL/DWDM/ Routers, ATM/Frame Relay/Ethernet Switch etc.
The Industry association COAI requests that a suitable notification be issued to allow set off of as additional duty of customs (SAD) against output service tax liability, or, to suitably reduce it in a phased manner like Central Sales Tax rate.
c) Exemption to Optical Fibre Cables
Optical fibre cables are classifiable under the Customs Tariff heading 8544 7090 and the rate of customs duty applicable to this sub -heading is Nil. However, the Hon'ble Advance Ruling Authority classified optical fibre cables under 9001 10 00 instead of 8544 70 90.
The main distinction between optical fibre cables falling under 8544 and 9001 is that under 8544 the individual optical fibers are sheathed while the same are not individually sheathed under 9001. The Assessee Company, who sought the ruling, could not provide the technical details to the Hon'ble Advance Ruling Authority to prove this point. In the absence of sufficient evidence, the Hon'ble Advance Ruling Authority classified this product under 9001.
COAI seeks that the duty for optical fibre cables for telecommunication should be fixed to Nil rate - whether they are classifiable under 8544 or 9001.
d) Excise Duty on BTS Cell sites
BTS Cell Sites are put up for providing Telecommunication services at various locations all over the country. Despite Circular no: 58/1/2002-CX dated 15/1/2002 and various judgments of the CESTAT and Hon'ble High Court holding that BTS Cell Sites are not excisable, the field formations are going on issuing Show Cause Notices to Telecom Operators on the issue resulting wastage of valuable time, manpower and money of both the department and the telecom operators.
COAI wants that a clarifying Circular be issued by the CBEC on the issue to put the dispute at rest.
3) Direct Taxes
a) Tax benefit under section 80-IA not available to companies undergoing amalgamation or de-merger after 31.3.2007
The existing provisions of section 80-IA provide for 100% deduction for ten years in respect of profits and gains of certain undertakings or enterprises engaged in the business of development, operation and maintenance of infrastructure facility, industrial parks and special economic zones or generation, distribution or transmission of power.
Sub-section (12) of section 80-IA provides, in the event of amalgamation or demerger of an Indian company (which is entitled to the deduction under section 80-IA) to another Indian company, the provisions of the said section 80-IA shall apply to the amalgamated or the resulting company.
However, Union Budget 2007-2008 proposed to insert a new sub-section (12A) in section 80-IA so that the provisions of sub-section (12) shall not apply to any undertaking or enterprise, which is transferred in a scheme of amalgamation or demerger after 31.3.2007. Because of this, the expansion by the telecom operators by way of acquisitions is likely to become tax inefficient.
The telecom industry demands that tax holiday benefits in case of mergers/ amalgamations should be continued and the Section 80 IA benefits to continue to companies undergoing amalgamation or demerger after 31.3.2007 as well.
b) Tax Holiday under Section 80-IA
As per existing provisions of section 80-IA services should commence before 1.4.2005. The industry demands that for the new licences issued, this period should be extended up to 1.4.2010.
C) Deduction in respect of Section 80-IA
COAI further expects that the period during which deduction under section 80 IA can be claimed by the telecom operators should be extended to 20 years in place of existing 15 years. The association also expects 100% exemption for successive 10 years out of 20 years, like available to other infrastructure sectors such as power, versus 100% exemption for 5 years and thereafter 30% exemption on profits of next 5 years out of 15 years currently available to Telecom companies.
d) Requirement of PAN/ Form 60/61
The requirement of quoting PAN number or the need to submit a declaration in Form 60/61 as per the rule 114 B of the Income Tax Act becomes an inhibitor/hurdle for spread of service to all strata of the society. This also creates administrative problems for the service providers and in certain cases it may lead to low-end subscribers form being deprived of the service.
COAI seeks that the requirement of quoting the PAN number at the time of taking a mobile connection, as per the Rule 114 B of the Income Tax Act has become redundant and should be dropped.
Analyst expectations
In the past, industry had represented before Ministry of Finance for rationalization of levies on telecom industry. While presenting the Finance Bill 2007, Finance Minister had remarked that the telecommunications industry has repeatedly requested that the multifarious taxes, charges and fees applicable to the industry should be unified and a single levy on revenue should be collected. He further proposed to request the Department of Telecommunications to constitute a committee to study the present structure of levies and make suitable recommendations to Government.
The Committee was formed and deliberated on the above issues. However, further steps are required for rationalization of levies at central as well as state level so as to reduce the cost of services.
Industry is looking forward towards announcement of steps to ensure early and orderly completion of 3G auctions which will be positive for the cash rich companies. The Government may give some guidelines for the same, as it will bring in the much needed revenues for the Government.
Industry is also looking for reduction of customs duty on specific convergence products such as handsets. The exemption from customs duty will lower the cost of handsets to local consumers which are primarily in the rural areas and will help in boosting the growth in rural India.
Companies to watch out for
Bharti Airtel, Reliance Communications
Outlook
India boasts of one of the lowest tariffs and ARPUs in the global telecom sector. But as the competition is set to intensify further with entry of new players in the telecom space, the country could witness further fall in tariffs and ARPUs.
While the tariffs in the industry are at their historical lows and also lowest in the world, the minutes of usage not increasing at that pace at which the tariffs are coming down and as a result the average revenue per user (ARPUs) for the incumbents is coming down on an ongoing basis.
Indian companies are looking at new avenues like data-based services to increase ARPUs. In this context, 3G become very important for these companies. Mobile Number Portability is also expected to become a reality soon as it will start from Sep 2009 in 9 circles.
Recently, the Government has fixed the license fee for country-wide 3G spectrum at about Rs 4040 crore. This is significantly higher than expectations of the telcos and may put pressure on their expected profitability from these services.
