Telecom: Industry body seeks a slew of reforms

Association of Unified Telecom Service Providers of India (AUSPI) is the representative industry body of Unified Access Service Licensees providing telecom services in the country with CDMA technology.

With India going through a telecommunication revolution, it is only but natural that the industry body would have a huge Budget wish-list for the finance minister.

 1.        It is a well-accepted fact that telecommunications is one of the important engines of economic growth that fuels activity and trade in all sectors from manufacturing to the provision of financial services. An increase in tele-density has a multiplier effect on GDP growth rate. Apart from the direct economic benefits, telecom is also quite well established as a powerful catalyst of social, educational and other cultural activities. In fact, increased speed of telecom revenues is being seen as significantly enhancing overall quality of life in a society.

2.         Liberalization and telecom reforms are known to be necessary to hasten growth in tele-density.  Telecom operators are now rolling out services in rural areas where cost of providing services is higher and per capita incomes are on the lower side and potential end users have much reduced purchasing power. Against this if the end user tariffs are high, then this may stifle growth and reduce the spread of telecom services. Therefore, there is need for a critical examination of the philosophy of application of duties and levies on telecom, which is an important requirement for ensuring sustainable and accelerated growth of the sector.

3.         AUSPI is pleased to submit the budget proposals for the Financial Year 2009-10.The proposals include issues relating to License Fee, Spectrum usage charges, Growth of broadband, rationalization of taxes & levies for telecom sector, Indirect Taxes including service tax, import-export policy and Direct Taxes.

I.  Reduction of Revenue Share License Fee & USO Fund Levy

(A)  Issues

Waiver of the license fees accruing on landlines / fixed line telephony to include wireless in the local loop (including PCOs).

Wire line phones to include fixed telephony / PCOs provided through copper, wireless-in-local loop, optical fibre cable and any new fixed access technology up to the subscriber's premises.

Suggests as follows:

In line with NTP 1999, the DoT should re-define landline to include all technologies –wireline, wireless, fibre-in-local-loop as well as any new access technology.

Any waiver of the licence fees accruing on landlines/ fixed line telephony should include wireless in the local loop (including PCOs).

The rationale for expanding the definition of fixed line telephony to include fixed wireless is given below.

i ) Fixed telephony growth will be driven by fixed wireless

Fixed line telephony base is in continuous decline; the growth is due to fixed wireless. For the past three years, wireline telephony has seen a continuous year-by-year decline (annual decline of 2.5%).  Despite a very low base, the fall is even more drastic in rural areas (annual decline of 5%), an area where the Government needs to boost connectivity.

Subscribers (in millions)	March '06	March '07	March '08
Total wireline subscribers	41.54	40.75	39.42
Urban	28.69	28.19	27.78
Rural	12.85	12.56	11.64
PCOs	4.20	5.55	6.19

Whatever growth is seen in the fixed telephony segment, it is from the fixed wireless segment.  For example, despite the phenomenal growth in mobile penetration, the PCO segment, which primarily caters to economically weaker sections, is showing a healthy growth (annual growth of 20%+). 

This growth in PCOs is almost entirely due to fixed wireless. Also, over the past few years, telecom service providers, including BSNL/ MTNL are providing fixed telephony in both urban and rural areas mainly through wireless rather than using wireline.

World over, wireless is the only financially viable option to expand fixed line telephony base. Wireless offers a number of benefits over wireline due to the following reasons:

More than five times cost differential per line between wireline telephony and fixed wireless telephony

Massive time-to-market advantages on back of scale benefits associated with wireless roll-out – that is, rolling out to say 100 households in a Taluka could take up to 6 months longer than providing connectivity using wireless

There are ongoing maintenance issues associated with wireline, especially in remote and rural areas. 

The fact that wireless is the only option for fixed telephony has been recognised across the world – both in developed markets and in the developing world:

USA: In recent years, connectivity in remote areas in the US – both for voice and Internet – is provided using fixed wireless.  Operators like Interlink (Iowa) are well recognised as connectivity success stories.  While potential customers grew tired of waiting for Central Office upgrades from phone companies, fixed wireless operators like InterLink could connect Iowa's lightly populated towns.

Bangladesh: Fixed wireless has connected villages and communities that wireline has failed to connect.  Grameen Telecom states that, on an average, about 70 people use one fixed wireless telephone in the rural areas connected.

Nepal: Under World Bank aid, it has been providing fixed wireless telephony that has been connecting remote villages in East Nepal

Wireless offers far greater customer benefits as compared to wireline  due to reliability, faster Internet access and multiple service options. In addition to financial viability, wireless offers much higher reliability – typically greater than 99.99%.  In comparison, wireline phones are down when they are most needed – both in natural disasters (floods, earthquakes etc.) as well during criminal activity.

Present generation fixed wireless can offer Internet connectivity at up to 144Kbps – which is 3x – 6x faster than what can be obtained using wireline connectivity (for most lines, given quality of copper and length of the local loop, broadband is almost always impossible). In addition, the customer benefits from other features such as phone book, CLI, SMS, ringtones, games etc.  The customer cannot have access to these features through wireline technology.  These benefits are particularly important in rural areas as it helps bridge the digital divide by helping disadvantaged rural masses leapfrog to a new technology. 

Ii ) Differentiation between wireless and wireline for fixed telephony goes against the  

     philosophy of technology neutrality

In line with international best practice, both the Government and the regulator have adopted a technology neutral philosophy.  Differentiating on the basis of the technology that delivers the fixed telephony services – that is differentiating on whether the access is on copper or wireless – goes completely against the grain of technology neutrality.

Offering incentives to a technology with limitations will only result in wasted subsidies and benefits to only one section of the industry.  On the other hand, a technology neutral regime will ensure that the industry adopts the most efficient technology for an application.

Definition of fixed telephony is due for change

NTP-99 has clearly acknowledged that technology is blurring between systems as wireline and wireless.  The definition of fixed telephony that limits it to wireline was framed at a time when no access technology other than copper wire was known to the mankind.  That is, the definition is about 50 years old!  We cannot continue with this definition when there have been massive changes in the underlying technology.

World over, wireless is the only financially viable option to expand fixed line telephony base

There is a more than five times cost differential per line between wireline telephony and fixed wireless telephony.  In addition, there are much higher ongoing maintenance issues associated with wireline, especially in remote and rural areas. 

Iii )  Conclusion

With wireline based access under severe decline, steps are needed to be taken to ensure continuing growth, consumer benefits and national development. In line with NTP-1999, the DoT should re-define landline to include all technologies – wireline, wireless, fibre-in-local-loop as well as any new access technology. 

A suggested definition is: "Wireline phones to include fixed telephony/ PCOs provided through copper, wireless-in-local-loop, optical fibre cable and any new fixed access technology up to the subscriber's premises".

Any waiver of the licence fees accruing on landlines/ fixed line telephony should include wireless in the local loop (including PCOs).

B )   Reduction in Revenue share license fee

Currently, the Telecom Access Service Providers are paying a high percentage as license fee through a revenue sharing model. This revenue share ranges between 6-10% of Adjusted Gross Revenue (AGR) per annum depending on the category of licensed circle service area as indicated below.

Circle service area	Annual license fee  (%age revenue share)
Metro/ Type A	10 %
Type B	8 %
Type C	6 %

It would be relevant to mention that if telecom service sector is to expand in the manner in which it is targeted and since all expansion is to be funded through the sector's own accruals, then the sector cannot be seen as a source of revenue for the Government.

It is of utmost necessity to reduce the licence fee from the present level in view of the fact that presently in addition to licence fee (6-10%) and spectrum fee (2-6%), the service providers pay service tax of 12%.

With effect from 1.1.2006, Government has reduced revenue share licence fee including USO contribution for long distance services to 6% from earlier level of 15%.  Therefore, in line with this decision of reduction in revenue share license fee for long distance services, there should be reduction in license fee to 6% including USO levy for Unified Access Service Licensees (UASLs) as well so as to maintain level playing field condition amongst service providers.  Further, UASLs have roll out obligation unlike long distance operators who do not have any roll out obligation.  In addition, UASLs incur cost of customer acquisition, advertisement, customer retention, billing and bad debts.

TRAI in its recommendations on unified licensing has proposed to the Government to reduce the license fee revenue share to 6% for all circle service areas. In view of the above, AUSPI recommends that license fee revenue share be limited to 6% of AGR inclusive of USOF levy.

C )  Reduction in Contribution towards Universal Service Obligation levy

With technological developments, deployment of more and more wireless technologies and the growth of telecom services in backward areas the Government should consider reviewing USO policy to reduce the level of USO contribution from its present level.

Service providers contribute towards USO Fund by contributing a uniform levy of 5% of the AGR.  The levy was necessary to subsidize service providers to rollout services in rural and remote areas.  With expansion of mobile services, the growth is now seen only in the rural and remote areas and thus effectively bridging the digital divide.  It was also observed during the bidding for USOF support for setting up and managing infrastructure sites and provision of mobile services that many service providers including PSUs were ready to provide services without subsidy.

This clearly shows that subsidy is not required and therefore, the contribution to USOF is not really required to the present level of 5% of AGR. Even TRAI, in its recent recommendation to the Government has recommended that for covering 75% of development blocks in service areas, there should be reduction in the contribution to USO Fund to 3%.

It is further submitted that BSNL per se is not entitled for so many benefits as it has setup huge rural network initially as a government when DoT/DTS was providing telecom services and subsequently from huge support in form of ADC and license fee waiver from the private sector and the government. The TRAI's ADC determinations not only ensured complete cost recovery for the rural telephony for BSNL but also a healthy return at the rate of 14%. Therefore, while private operators were struggling to expand network, BSNL was all along assured of a healthy profit of 14% even for so called unviable rural telephony. BSNL has got following support in last 5 years from ADC and government concessions.

The telecom commission's decision to have stringent benchmark to be eligible for reduced   USO levy will not help increase the rural coverage or competition. An achievable benchmark would push operators to rollout services in rural areas and help achieve higher rural tele-density, bridge urban rural divide and enhance competition levels in rural areas.

The government is aware that private operators are moving in rural areas against all odds and without any significant support from the government.  The prescribed stringent benchmark of 95% coverage would be a deterrent for the private operators to move into rural areas. It is therefore earnestly requested that the decision may kindly be reviewed and reduced USO levy of 3% may be extended to service providers who cover 75% of the rural areas.

AUSPI, therefore, suggests two-step reduction in USOF contribution i.e in the first step, reduce the contribution to 3% this year and the year next Contribution to USOF should be zero.

II.   Reduction in annual spectrum usage charges

Radio spectrum is a key requirement for the provision of any wireless service. Adequate spectrum at an affordable charge is an important determinant of both the cost and quality of the wireless services to the end-user.

There are two parts in spectrum usage charges.  One is the entry fee for the right to use spectrum and the other is annual usage charge.

All the licenses of the Government mandates a certain amount of spectrum 2 x 6.2 MHz for GSM and 2 x 5 MHz for CDMA.

Service providers having spectrum beyond the contracted amount should be levied acquisition charge. This amount works out to Rs. 1312 crores per MHz.

Service providers having spectrum beyond the contracted amount should pay enhanced spectrum usage charge (on incremental basis) beyond the contracted amount of spectrum eg for 7.2 MHz 5% of Annual Gross Revenue (AGR) in a step of 2% to for 10.2 MHz 11%.

III.   Special Emphasis on growth of broadband

 

Broadband has immense potential to bring in the benefits of Information technology to the masses. The service provisioning requires heavy investments. While announcing the Broadband Policy, the Hon'ble Minister of Communications & IT has categorically stated that the DoT would work out a package in consultation with the Ministry of Finance and related departments for reduction in fiscal levies / taxes and duties, the incidence of which results in increased costs to the end customer.

Broadband services can reach the urban and rural consumers only if services are offered at affordable and easy terms.

The TRAI has also recommended the same in its recommendations on "Accelerating Growth of Broadband Services."

To achieve this, we recommend that the service tax on broadband and pure internet services should be abolished.

IV )   Rationalization of Taxes for Telecom Services Sector

Present taxation structure in telecom services sector is very complex and needs to be made simpler by  rationalizing taxation regime so as to make the industry, investor friendly / consumer friendly.

The sector faces multiple taxes and levies which are one of the highest for some of the taxes and levies compared even to some Asian countries as depicted in table- I. The various levies on the telecom sector include licence fee 6-10%, spectrum charges2-6%, access deficit charge 1.5%, service tax 12% education cess 2%, right of way charge around 2-3% Customs and Excise duty and cost of about 1-2% due to the huge bank  guarantees to the Government.

 In addition to central Taxes & Levies, there are state level taxes and levies like ocroi, municipal charges, RoW  charges etc.  also existing for the service providers .

Thus the telecom subscriber is burdened with about 26% as taxes and levies. Despite the relatively higher taxes, telecom tariffs in India are among the lowest in the world due to competition and mobile services sectors continues to grow exponentially. However, with very low average revenue per user, and rock-bottom tariffs, the present growth is not sustainable unless drastic policy interventions are made urgently to address the convoluted tax structure in the sector. Hence the convoluted taxes & levies structure on the telecom service sector, needs to be rationalized.

The Hon'ble Finance Minister of Indian, Shri  P. Chidambaram, in his Inaugural Address at the 77th FICCI Annual General Meeting on 27th December, 2004 has promised that he would address the complex taxation structure presently existing in  the Indian telecom sector and come out with investor – friendly, industry- friendly simple tax structure in the next budget.  Relevant extract of his speech is reproduced below:

Quote

" The second aspects which your President touched upon are four sectors which, while he may have referred to them in one context, are extremely important to me in another context. These are – textiles, petroleum, sugar and telecom. Now, what is common among these four? In my humble view, what is common among these four sector is a convoluted tax structure that applies to these sectors. From time to time, all of us have contributed to the convoluted tax structure.  We have to unravel this. We have to make this simple, investment friendly and industry- friendly.  Last year, you will recall, I made a beginning with one part of the textile sector, namely natural fibres. And I acknowledge readily that it is an unfinished exercise, that there is another part of the textile sector, namely man-made fibres, which requires attention.  But to textile we must add petroleum, sugar and telecom as sectors which have a very complex taxation structure. I promise that we will address this complex taxation structure and come out with an investor-friendly, industry-friendly simple tax structure in the next budget."

                                                                                                                                                                                                                                                                                                Unuote

Table-1                                                                                                                     

Taxes & Levies  in Various Countries

	Pakistan	Sri Lanka	China	Malaysia	India
Sector charges	% of  Revenue	% of Revenue	% of Revenue	% of Revenue	% of Revenue
Service Tax GST	GST	VAT	3 %	5 %	12 % + GST
Licence Fee	0.5%+ 0.5% R&D	0.3% Turnover (T.O) + 1% of capital invested	Nil	0.5 %	6- 10 %
Spectrum Charges	Cost Recovery	~1.1 % of T.O	~0.5 % China mobile	Nil	2- 6 %
USO	1.5 %	Nil Only on ISD calls	Nil	1 %	Included in Licence Fee
Total Sector Charges	2.5 % + GST + Cost recovery	1.3 % T.O + 1 % Invested + VAT	~ 0.5% + 3% Tax	6.5 %	20%~ 28 % + GST

*   Backbone Spectrum Charges extra

** Estimated from Spectrum fees & revenue of China Mobile

Source: TRAI

V.     Indirect  Taxes

(A)        Custom Duty

The Customs Duty rates for Telecom equipment range from 4% to 37% with the highest rate applicable on Transducers, spares for Telecom equipment increasing the cost of the equipment in terms of cash outflow.  It is suggested to bring all the items required for the Telecom Project including the spares under the zero percent basic duty category to reduce the capital cost which can translate into better tariffs for the customer.

1.Removal of  IT Duty of 4% is sought as it has increased the burden on the capital equipment cost. Since this is not CENVATABLE, this adds up to the Project cost. Presently this is applicable on all items, from 2006-07, rather than only on specific items as was the case earlier. Moreover, with the promulgation of Notification No. 102/07 granting refund of this duty to traders in these items puts the actual user at a distinct disadvantage.

2. Other concessions sought are:

Reduction in customs duty on imported equipment required for telecommunication services.

Continuation of Basic Duty Concessions for network infrastructure equipment.

Import Tariff & Excise  duties for customer premises equipment (CPE) for broadband service should be brought to zero. The availability of Customer Premises Equipment (CPE) at an affordable    price   is   a   key   factor for broadband  to be successful in rural kind of scenario.  A mechanism needs to be created through which the TCO for CPE tends to zero.

Microwave equipment to be included in the list of zero duty imports.

The Notification No 7/2004-CUSTOMS dated 8th Jan 2004 allows zero duty imports + CVD of 16% on specific goods listed for provisioning of Basic Telephone Services, Cellular Mobile Telephone Services, Internet Services or CUG 64 KBPS Domestic Data Network via INSAT Satellite System. The list of goods includes both switching and transmission equipment required for the different services. One of the items on this list which has concessional duty is Base Station which reads as follows: "Radio Communication Equipment including VHF, UHF and microwave communication equipment of the following description:-(a) Base Transceiver Station (BTS) (b)…".

The Customs Department at the time of clearance gives the benefit of concessional duty only on BTS and when microwave equipment is imported, the duty is charged at 27.8% (10% Basic Duty).

It is thus sought that a clarification be provided to include microwave equipment also at the concessional duty as is mentioned above.

(v)         Exemption to imported OFC used by Telecom Industry from Customs Duty:

As per Circular No. 191/25/96-CX Dt.27.03.1996, Optical Fibre Cables (OFCs) used by telecom industry are classified under the Tariff Heading 8544. OFCs, which individually sheathed are classified under 8544 and rest under 9001 At present, OFCs used by telecom industry are classified under 8544. As per the Advance Ruling in the matter of Alcatel, OFCs not individually sheathed, used by telecom industry, are classifiable under 9001 and attracts 15% customs duty, which has created big confusion among OFC importers and Customs Authorities.

As a one more step towards boosting telecom industry, Government should issue a clarification stating that OFCs used in telecom industry, whether individually sheathed/coated are classifiable under CTH no:8544 and exempted from Customs Duty  under notification no:24/2005 Cus. Dtd. 01/03/2005, in pursuance of Information Technology Agreement as per WTO agreements.

Wireless connectivity is the only cost effective and affordable way to provide internet / broadband to the remote areas were the wire line connectivity is extremely costly and difficult to achieve

(vi)   Imports under EPCG by group company and fulfillment of Export  

        Obligation:

Notification no: 97/2004 Customs dated 17/9/2004,under proviso 2 to Explanation clause 4(ii) stipulates that export obligation  for Import under EPCG may be fulfilled by exports of  goods manufactured by group company, it restricts  fulfillment of  export obligation by export of services by group company.

As the Service Industry is earning enormous foreign exchange, contributing large volume to exports, request to remove this discrimination and include exports of services by group companies towards fulfillment of exports obligations against EPCG. Necessary amendment to said notification may please be issued.

The request may be considered sympathetically since the predecessor Notification No. 55/2003 allowed this facility & corresponding provisions in the Foreign Trade Policy have remained unaltered.

(vii)   Refund of Special Additional Duty of Customs:

Special Additional duty of Customs is leviable under sub-section (5) of section (3) Customs Tariff Act,1975. As per notification no:102/2007 Cus. Dated 14/09/2007, when the goods are imported for subsequent sale in India, special Additional duty of Customs will be refunded on submission of Refund claim along with relevant documents.

As per clause (b) of sub-section(1) of section 27 of Customs Act,1962, the time limit for  claiming refund is prescribed as  six months from the date of payment of duty whereas in the instant case ,the refund is contingent upon payment of VAT/Sales Tax on sale of such imported goods. Ideally, the time period of six months shall be counted from the date of VAT/Sales Tax payment.  Accordingly, the goods imported prior to the date of notification and sold on or after 14.09.2007 shall also be eligible for Refund of the said duty.

The said Notification should be appropriately amended so as to override the provisions of time limit provided in the section 27 of the Customs Act, 1962 to impart clarity on the issue thus futile litigation could be avoided.

B )      Excise Duty

(i)         Duty Structure be recommended at concessional slab of 8%:

Excise duty on all locally manufactured telecom equipments be pegged at the lowest level of 8% to provide maximum support to both the manufacturing and services segments of the telecom industry.

Service providers sourcing indigenously manufactured telecom equipment have now been allowed to setoff against the service tax payable on the services. This is a welcome move and would also incentivise service providers to source indigenous equipment in the fiercely competitive global equipment market.

(ii)        Applicability of Excise Duty on of BTS/Cell Sites(Towers):

Base Transceiver Station (BTS)/Cell Sites are installed at various locations by the telecom service providers, to make the wireless communication network operational. Base Transceiver Station comprising of Mother equipment, signal transport equipment, antenna, Switch Mode Power supply, battery, DG set, antenna tower, prefab shelter or civil room, automatic voltage regulator, aviation light, civil foundation and electrical work etc. Configuration of all these equipment does not transform this System into any "goods". Base Transceiver Station/Cell Site is an  immovable property and cannot be termed as  "Goods" for the purpose of charging excise duty  under Central Excise Act as per clarifications issued by the CBEC vide circular no:58/1/2002 dated 15/1/2002.

Even after various decisions of the Hon'ble Tribunal & High Court, in a number of cases, cited above, Central Excise Authorities, all over the country, are constantly gathering data and issuing Show Cause Notice to Telecom operators, demanding duty on the BTS Cell Sites (Towers), which is resulting into wastage of valuable time and money of the Government as well as of the Assesses.

CBE&C may issue a circular, clarifying that BTS/Cell Sites(Towers) are not goods and therefore not liable for excise duty, in view of the circular no:58/1/2002 dated 15/1/2002, so that avoidable litigation can be put to an end.

(iii)        Excise duty for import of IT / Telecom Software

Notification No. 6/2006-Central Excise dated 1st March, 2006   exempts excise duty or CVD of 8 % and cess on any customized software (that is say, any custom designed software, developed for a specific user or client), other than packaged software or canned software. However, after January 2007, the customs tariff head of IT / Telecom Software has been changed from 8524 to 8523 without any amendment to notification no. 6/2006- central excise dated 1st March, 2006. This has resulted a levy of CVD 8 % and cess 3 % on IT / Telecom Software by custom authorities. It is suggested that a suitable amendment to Notification No. 6/2006 dated 1st March 2006 be issued so as to avail the exemption of duties permitted on IT/Telecom software.

iv) Excise duty for import of cellular/ fixed wireless phones/ IFWPs

Prior to January 2007, cellular phones/Fixed wireless phones/ IFWPs were covered under tariff head 8525 20 17. These items are now covered under tariff head 8517 12 10 and 8517 12 90 without any amendment to notification no. 6/2006- central excise dated 1st March, 2006. This is leading to misinterpretation by custom authorities and CVD 8 % and cess 3 % on the items are levied. It is suggested that a suitable amendment to Notification No. 6/2006 dated 1st March 2006 be issued so as to avail the exemption of duties permitted for import of cellular phones/ Fixed wireless phones/ IFWPs.

     (v)    Additional duty of 4% on imported telecom equipment

An additional duty of 4% has been imposed on goods including telecom equipment as per Notification No. 19/2005 – customs dated 1st March, 2005. This is however, CENVAT-able to a manufacturer of equipment. But the telecom service providers importing fully assembled equipment directly or through an Indian telecom company, responsible for supply and service are burdened with this additional duty of 4%, since there is no value addition involved. The Govt. has committed to develop telecommunications particularly in rural and remote areas to bridge the digital divide. It is therefore suggested that exemption from this additional duty of 4% be provided for fully assembled imported telecom equipment.  

(vi)                    Some cases of Inverted duty structure

When certain parts of telecom equipment such as racks, feeder cable, and batteries for SMPS etc are imported, the importer some times pays more percentage of customs duty than what would have been paid for fully imported equipment containing the parts imported. Hence it is suggested that duty structure for parts when imported for telecommunications purpose should not be more than the duty rates specified for tariff head 8517 in general.

      C )    Credit of Additional Customs Duty paid on imported equipment

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 has exempted customs duty on specified items covered under the Information Technology Agreement (ITA). BCD has been removed on mobile phones covered under the Information Technology Agreement (ITA). Also, all goods required for the manufacture of the ITA bound items have also been exempted from the customs duty subject to end use condition.

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 of 4% has been imposed/levied on ITA bound items (including mobiles) and their inputs which attract 'nil' duty. The ACD paid can be availed as credit against payment of excise duty on finished products and not against output service tax liability. Manufacturers are entitled to avail credit of this ACD for payment of excise duty on their finished goods. However, telecom operators being service providers and not manufacturer are not eligible to avail credit of this 4% ACD, as per Proviso 3 of sub-rule (4) of Rule 3 of CENVAT Credit Rules, 2004. Hence, the 4% ACD paid on inputs would be an added cost on the telecom service providers.

It is requested that the proviso to Rule 3(4) may be deleted from CENVAT Credit Rules, to enable the service providers to avail credit of ACD. This will provide a level playing between manufacturer and service provider.

    D )    Utilization of 100% CENVAT Credit on 17 Services:

As per sub-rule (5) of rule 6 of CENVAT Credit Rules,2004, Notwithstanding anything contained in sub-rules (1), (2) and (3),CENVAT credit of the service tax paid  on 17 specified  services shall be allowed. A fairly large section of the Department holds the view that the said Rule merely allows availment of the Cenvat credit  on the 17 specified services only & the utilization thereof would continue to be governed by the Rule 6(3)(c) of the said Rules i.e. utilization cap of 20% would operate on the said credit also. On the basis of this interpretation, Show Cause Notices are being issued demanding recovery of the so called excess utilization of the credit & attendant interest & proposing penal action. A clarificatory circular may please be issued by the Central Board of Excise & Customs that CENVAT Credit taken on 17 services can be utilized in full without any restriction laid down under clause( C ) of sub-rule(3) of rule(6) of CENVAT Credit rules,2004. This would help to avoid unnecessary litigation.

E )   Levy of Service Tax on Renting of Immovable Property for use in

          Commerce & Business

The Union Budget of 2007 -2008 has extended the levy of Service tax to Renting of immovable property for use in commerce and business. It may be pertinent to note that Stamp Duty is already payable at the time of entering the agreement. Levy of Service Tax on Renting of Immovable Property for use in Commerce and Business was not called for and this levy will act as an additional burden on the telecom service providers.

Impact

This levy will lead to administrative problems, as the service provider will first pay the service tax and then claim the credit.

This levy will act as a burden and have a cascading effect on the costs and will thus result in inflationary pressures in the economy. This will thus increase the cost of service for the end user.

There will be an adverse impact on roll out of affordable services to all areas and especially to the semi-urban and rural areas.

Thus it will act against the Government objective of rapid spread of affordable telecom service – achieving 500 million telecom subscribers by 2010.

The said service provided to Telecom Service Providers may be exempted from levy of Service Tax by issuing an exemption Notification.

Service tax on renting of immovable property for use in commerce and business should not be levied.

F )       Alignment of definition of 'Export of Services' under Service Tax   Law       with Foreign Trade Policy

Under Export of Services Rules, 2005, any service provided by a service provider is treated as export and exempted from service tax, provided - Such service is provided from India and used outside India & Payment for such service is received in convertible foreign exchange;

The services that qualify as export under the Foreign trade policy (FTP) (Para 9.53) are as under:

Supply of a 'service' from India to any other Country;

Supply of a 'service' from India to service consumer of any other Country in India; and

Supply of a 'service' from India through commercial or physical presence in territory of any other Country;

Supply of a 'service' in India relating to exports paid in free foreign exchange or in Indian Rupees which are otherwise considered as having being paid for in free foreign exchange by RBI.

When viewed together a certain degree of divergence is apparent in view of points (ii) & (iv) of the FTP. For example, provision of roaming facility by an Indian telecom operator to the customer/subscriber of a foreign telecom operator, while the customer/subscriber is in India.

Foreign trade policy recognizes such service as export, eligible for benefits provided under the policy. However, as per service tax law, such service does not merit exemption, as the services are provided in India.

Similarly, services provided in India relating to exports are recognized as exports under the Foreign Trade Policy, while the same does not merit exemption under the Service Tax Law as they are performed/ provided in India.

The parameters prescribed in FTP are practical and encourage the export of services. The parameters under the Export of Service Rules, 2005 should be amended and brought in line with the FTP.

The provisions in the FTP &  in the Service Tax as regards exports be harmonized. Genuine push to the services exports from India...

G )     20% limit on CENVAT Claim:

Huge accumulation of Cenvat credit due to limit of 20% utilization towards Input and Input services in case both exempted and taxable services are provided by the service provider under Rule 6(3)(c) of the Cenvat credit Rules 2004.

As per Rule 6(3)(c) of the Cenvat credit rules, the provider of output services shall utilize credit only upto an extent of an amount not exceeding 20% of the amount of service tax payable on taxable output service if he doesn't opt for segregation of accounts of inputs & input services meant for exempted & taxable output services.

Only a few of the telecommunication services like services provided to United Nations or an international organization or developer/units in Special Economic Zone or PCO for local calls are exempted from service tax.

The exempted services as compared to the total revenue constitutes a miniscule amount   which may be less than even 1% of the entire revenue of the Service Provider. However to comply with Rule 6 of the Cenvat Credit Rules 2004, the Service Provider shall have to either maintain separate records for Inputs and Input Services used for exempted and taxable services, which is impossible looking at the nature and quantum of the business transactions or the   utilization of credit availed on Inputs and Input Services has to be done within the limit of 20% of the tax liability on output services resulting in accumulation of credit.

In this regard it is also pertinent to mention that telecom service providers are compelled to offer exempted services as per the various circulars issued by the Ministry of Finance. The aim of these circulars or policy guidelines is to provide benefits to certain sections of the economy. No benefits accrue to the telecom service providers. On the contrary they become liable to maintain separate accounts, which is practically not possible/ feasible and hence the telecom service providers are severely constrained to claim credit within in the limit of 20% only.

With the introduction of the new definition of telecommunication service w.e.f. 01.06.2007 almost the entire gamut of services provided by the telecom operators have been covered under the service tax net barring few exempted services as mentioned in foregoing Paras.

Especially, inclusion of Interconnect Usage Charges in the Service Tax net has begun to contribute high accumulation of CENVAT Credit. The situation is likely to worsen further with the demerger of passive infrastructure by almost all telecom operators & its sharing amongst themselves for provision of services in pursuance of recommendations of Telecom Regulatory Authority of India.

The issue needs thorough examination in view of the fact that the said limit of credit utilization was set at 35% under the Service Tax Credit Rules, 2002 when the input credit attributing services were only 39 whereas with the notification of Cenvat Credit Rules, 2004 permitting Cenvat credit across goods & services, the same was brought down to 20% but still at   that  time ,input credit yielding services were only 73. As against this, as on 01.06.2007, number of the input credit yielding services has gone up to 100 but the limit of   utilization continues to be 20% resulting not only in accumulation of credit on one hand but  also enhanced PLA payment of Service Tax causing huge working capital requirement for telecom operators. Moreover, the static limit of 20% is in discordance to the fundamental principle of "cash payment only on the value added component" of the Cenvat theory.

Reinstatement of the utilization limit of 35% as provided in the Service Tax Credit  Rules, 2002 by amending the Rule 6(3) (c) of the Cenvat Credit Rules,2004 Or alternatively  the provisions of the Rule 6(3) (d ) of the Cenvat Credit Rules,2004 may be extended to Telecommunication service also.

The same will enable the service providers to utilize Cenvat Credit more efficiently. This step will lower the burden on service providers and will thereby enable faster roll-out of telecom infrastructure in the country.

We would like to reiterate that Telecom is the only sector in India in which tariffs have been falling continuously and this is the only sector which has continuously absorbed inflation.  The above step will enable the service providers to sustain this regime of ever falling tariffs.

(H)    Benefit of sub-rule (6) of Rule 6 of CENVAT Credit Rules, 2004 to

                Service Providers:

As per Rule 6(6), a manufacturer would be entitled to take CENVAT Credit on input goods and services used in the manufacture of excisable goods removed without payment of duty:

i.  cleared to a unit in a special economic zone; or

ii.  cleared to a hundred per cent. export-oriented undertaking;

  cleared to a unit in an Electronic Hardware Technology Park or Software    

         Technology Park; or

supplied to the United Nations or specified international organizations; or

cleared for export under bond in terms of the provisions of the Central   

      Excise Rules, 2002; or

  Gold or silver falling within Chapter 71 of the said First Schedule,  arising in the course of manufacture of copper or zinc by smelting. 

It can be observed from the above that the benefit of input CENVAT Credit has been given with respect to items (i) to (iv)above are with a view to encourage exports from the Country. Since input credits are allowed, the cost to the exporting unit would be less and they would become more competitive internationally.

In case of service providers, output services provided to units in special economic zone are exempt from service tax. We             understand that Government is also considering exempting from    service tax the output services provided to export oriented units and          unit is Electronic Hardware Technology Park and Software Technology Park.  There is no logic for not extending the benefit of   input credit on input goods and services used for providing             exempted output services to the above entities.  The export of services from the Country should also be made competitive especially in view of the fact that China and other surrounding Asian Countries are becoming a big exporter of services to US and other Western Countries.

Hence it is requested that the provisions of Rule 6(6) be         extended to output service providers also whereby they will be able to take input CENVAT Credit on input services used for providing output services to specified units like (a) units in SEZ (b) EOUs (c) units in Electronic Hardware and Software Technology Parks (d) United Nations (e) foreign embassies, etc.

(I)      Service tax on import of services

Since, as per the service tax credit rules, amount of service tax deposited on behalf of foreign company could be setoff against the output service tax liability, a clarification should be issued to do away with the requirement of registration of foreign company in India. Credit should also be allowed for VAT or any other duty paid in foreign country on the same income.

(J)      Excise duty CENVAT rule in respect of cable/shelter and Towers

Telecom service providers lay cables across the country and the same is covered under chapter 85 of the Excise Tariff rules hence it is treated as capital goods under the CENVAT credit rules.

To avail the credit, capital goods should be installed with in the premises of the service provider, however in case of cables laid across the country the same is not possible.

If capital goods are taken out of the premises of the output service provider and not returned within a period of 180 days, then the CENVAT credit claimed on the same has to be reversed.

The telecom service providers have to install assets such as BTS, cables, RSUs, boosters across their respective service area.

Suppose the operators were to consider BTS sites as business premises then there will be a need to inform the department about the same. This will entail informing for huge number of sites on account of additions and changes in addresses.

Magnitude of administration, record keeping, both from the operator's point of view as well as department's perspective, would be very high.

The issue has arisen probably because of mechanical marriage of Service Tax Credit Rules, 2002 with Cenvat Credit Rules,2002 while drafting the Cenvat Credit Rules,2004.

h) There is an urgent need to re-look at the Rules from the service industries point of view  

     also.

I ) The concept of business premises in the context of service provider especially telecom service providers should be  revisited so as to clearly define it &  to include the licensed service area in terms of the allotted telecom licenses.  OR CENVAT credit rules be modified suitably to take care of needs of Telecom industry.

j )  A clarification on this would remove administrative problems.

This will also enable smoother and faster roll-out of service.  In the present scenario when TRAI on one side is trying to motivate the industry to go in for expansion in rural areas and has also recommended subsidies to private operators setting up network in rural areas, such restrictions on CENVAT credits is uncalled for particularly when this industry is booming and is generating huge revenues for the Central Govt.

Premises of Telecom service providers should be clearly defined so as to include the licensed service area in terms of the granted telecom licences to remove administrative problems.

VI.        Import-Export  Policy:

A )        Delegation to licensing authority to grant approval for import of restricted items:

Para 5.1 of Import Export Policy Last para reads as under:

'Import of Restricted items of imports mentioned under ITC (HS) shall only be allowed to be imported under the Scheme after approval from the Import Licensing Committee'.

To facilitate import of restricted items at much better pace, the   Para 5.1 of the policy may be amended as under:

Proposed Amendment

Import of Restricted items of imports mentioned under ITC (HS) shall only be allowed to be imported under the Scheme after approval from the Import Licensing Committee/Authority'.

  B )   Export obligation fulfillment by a related person/company:

Para 5.4 of Import Export Policy 5th para reads as under

"Alternatively, export obligation may also be fulfilled by exports of other goods(s) manufactured or service(s) provided by the same/firm/company or group company/managed hotel which has the EPCG Authorisation".

Many of the companies, relating to the importers, may not fall under the definition of 'Group Company', even though they are related to one another. The facility under para 5.4 may be extended to exports by related persons/companies.

Proposed Amendment:

"Alternatively, export obligation may also be fulfilled by exports of other goods(s) manufactured or service(s) provided by the same/firm/company or group company/related person/company managed hotel which has the EPCG Authorisation.

C )   Facility of transfer of duty credit scrips/goods imported under the scheme obligation 

        fulfillment by a related person/company:

Para 3.6.4.6 of Import Export Policy 2nd para reads as under:

"However, transfer of duty credit scrips/goods imported under the scheme shall be allowed within the service providers of the Group Company as defined in chapter 9 and managed hotels, with actual user condition".

The facility of transfer of duty credit scrips/goods imported under the scheme may be extended to related persons/companies of the importer/scrip holder.

Proposed Amendment

"However, transfer of duty credit scrips/goods imported under the scheme should be allowed within the service providers of the Group Company as defined in chapter 9 or related person/ company and managed hotels, with actual user condition".

D )  Facility of import of capital goods for use in the service sector business of the  

      Group Company:

To add a para after 3.6.4.6 of Import Export Policy

"Duty credit scrip may be used for import of any capital goods including spares, office equipment and professional equipment, office furniture and consumables that are otherwise freely importable under ITC (HS) Classification of Export and Import items. The imports shall relate to any service sector business of the applicant".

The facility may be extended to group Company of the service provider.

Proposed Amendment

"Duty credit scrip may be used for import of any capital goods including spares, office equipment and professional equipment, office furniture and consumables; that are otherwise freely importable under ITC (HS) Classification of Export and Import items. The imports shall relate to any service sector business of the applicant/Group Company".

VII.   Direct Taxes

A )  Section 80IA of the Income Tax Act, 1961 should provide benefit to the telecom services sector at par with other infrastructure facilities provider.

Sub section 2A of section 80IA, however, provides that for the companies engaged in the business of providing telecommunication services, the exemption for the first 5 years would be 100% and for next 5 years it would be 30% of the profits of the gains of the enterprise. The sub section 2A of section 80IA may be deleted and 100% tax exemption for 10 years may be allowed to telecommunication service providers in line with infrastructure facilities providers. The distinction between other infrastructure providers and telecommunication service providers is arbitrary since telecommunication services are core infrastructure facilities. This would foster the growth of infrastructure facilities relating to telecom leading to higher growth in the sector.

Also, telecommunication services, like other infrastructure services, require major capital investments and operational outflows initially. Accordingly, its gestation period is comparatively longer. Hence, it is requested that the eligible period for the benefit may be extended to 10 years from the current period of 5 years to enable the telecommunication service providers to utilize the benefit under section 80IA in its true intent, which would   enable them to provide more economical and efficient services to the subscribers.

B ) Section 80(I)(A) – Identification of undertaking

In the Infrastructure Sector, each infrastructure facility by itself constitutes an undertaking.  Thus, a company developing roads would be entitled to the Tax Holiday benefit in respect of each "road undertaking" if the company is engaged in developing more than one road.  The period for Tax Holiday would, in each case, commence from the year in which each road becomes operational. In the case of Telecom Services, however, it is not easy to identify distinct undertakings.  Thus, increase in level of penetration of a Telecom Undertaking in an area already serviced by a telecom undertaking is not recognized as distinct or a separate undertaking.  As a result, the Tax Holiday period commences from the year in which the undertaking commences business and there is no separate period available in respect of the increased profits arising on account of the deeper penetration by construction of additional infrastructure such as BTS Towers, cables, etc.

It is, therefore, necessary in the context of Telecom Undertakings to provide that any expansion of the undertaking by way of fresh investment exceeding a certain threshold, say 10% of the existing capital expenditure made by an undertaking, should separately qualify as an "undertaking" deemed to commence operations from the year in which the expansion is carried out.  As a corollary, it would also be necessary to extend the date up to which the undertakings can be set up from 31st March 2005 to a later date, say,  up to 31st March, 2010, by which time most Telecom Undertakings would have acquired the requisite level of maturity.

C ) Extension of Tax benefit U/S 80-IA to companies undergoing   amalgamation or   demerger after 31.3.2007.

Tax benefit U/S 80-IA to companies undergoing amalgamation or Demerger after 31.3.2007 has been withdrawn. To make acquisitions tax efficient the benefit under section 80-IA to companies undergoing amalgamation or demerger after 31.3.2007 be extended.  This would support the objective of affordable telecom service in the country.

It is suggested that this benefit be extended to companies undergoing amalgamation or demerger upto 31.3. 2010.

D )   Continuance of benefits u/s 80-IA in case of slump sales

The importance and need of the industries for amalgamation, merger and demerger have been recognised in various provisions of the Income tax Act, 1961 like section 10A, 10B, 35AB, 72A, 80IA, 80IB etc and continuance of the tax benefits have been provided for in case of amalgamation, demergers etc. However, the amalgamation, demergers etc, involve lengthy process of obtaining High Court approvals. Continuance of the existing tax benefits has not been provided for in case of Slump sale of the undertaking.

In India, the telecom sector is one of the most expanding and evolving sectors. For providing better services and to achieve higher efficiency and effectiveness, the telecom service providers need to restructure itself. One of the faster and simpler methods of achieving the same would be through slump sale of the undertaking. If the various benefits attached to the undertaking are continued in the hands of the transferee of the undertaking in a slump sale, then it would be a great boost for the telecom sector. Though the intention is that the benefit is attached to the undertaking only, the said intention is not reflected in the provisions of the Act in respect of the slump sale. The sector can achieve desired restructuring through simpler and faster means of slum sale, which would avoid approaching the High Courts for their approvals.

E )      Clarification on TDS with respect to interconnect usage charges (IUC) paid by one operator to another.

Interconnect usage charges are not in the nature of fees for technical service but for allowing the call from one service provider to be carried over to the other service provider. As such, the existing telecom service providers have to provide interconnection of their networks, equipment to the networks and equipment of the new telecom service providers to provide the subscribers efficient and flawless service. These interconnection issues between the service providers are very crucial issues to deal with the Department of Telecommunications and Telecom Regulatory Authority of India (TRAI).

To resolve the issue and to fix the terms and conditions of interconnectivity between Service Providers, to ensure effective interconnection between different service providers and to regulate arrangements amongst service providers of sharing their revenue derived from providing telecommunication services, TRAI has made THE TELECOMMUNICATION INTERCONNECTION USAGE CHARGES (IUC) REGULATION, 2003   (1 of 2003). Through this Regulation, TRAI has provided for inter connection charges payable by one service provider to another service provider for the purpose of inter connection.

The following definitions of the Regulation are relevant for the matter:

"Interconnection" means the commercial and technical arrangements under which service providers connect their equipment, networks and services to enable their customers to have access to the customers, services and networks of other service providers.

Interconnection Charge" means the charge for interconnection levied by an interconnection provider on an interconnection seeker.

"Interconnection Usage Charge (IUC)" means the charge payable by one service provider to one or more service providers for usage of the network elements for origination, transit and termination of the calls.

"Interconnection Provider" means the service provider to whose network an interconnection is sought for providing telecommunication services.

"Interconnection Seeker" means the service provider who seeks interconnection to the network of the interconnection provider.

From the above definitions, it is obvious that through the process of interconnection, one service provider establishes a link between its own network, services and equipment with the network, services and equipment of other service provider. For facilitating these arrangements, TRAI has made the Regulation for IUC charges payable. Under the IUC regime, one service provider only uses the network elements (for carrying the calls to their destination) of other service provider. By providing the inter connection, the Interconnection provider does not render any services either to the Interconnection Seeker or to the subscriber of the services.

In such Interconnection, the user telecom service provider utilizes the facilities, switches etc. for transferring the calls from one network to another network. The same cannot be considered as provision of technical services.

Fees for technical services has been defined in Explanation (b) to section 194J read with Explanation 2 to section 9(1)(vii) of the Act as under:

"Fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".

From the above definition, it can be observed that "technical services" involve rendering of services of managerial, technical or consultancy nature. Provisions of interconnect facilities and receiving and handing over of the calls do not involve rendering of any services. In Interconnect Agreements, the user utilizes the technical equipment for interconnect purposes.

Just because technical equipment/gadgets are used in the process, it does not make the contract as that of rendering of technical services.

In the case of Skycell Communications Ltd. vs DCIT (2001) 119 Taxman 496, the Hon'ble Madras High Court has held that for the purpose of section 194J of the Act to become applicable, it is necessary that the payee receives 'services'. If the payee uses only technical gadgets, which are made available to others also for fees, the same does not make the payment subject to tax deduction at source under section 194J of the Act.

Relying on the said decision, 'interconnect facilities' can be considered as 'technical equipment provided by the Interconnection Providers to the Interconnection Seekers. However, it would not result into provisions of services by the receiver of the fees. Accordingly, the IUC cannot be made subject to deduction of tax at source under section 194J of the Act.

Telecom sector is already under 80IA and hence, this TDS deduction running into crores of rupees cause unnecessary hardships for the telecom sector. Hence, we request a clarification for non-deduction of tax on IUC.

 F )   TDS on reimbursements be discontinued

At present TDS is deducted even on the value of re-imbursement included in a particular payment. Since TDS is tax on income and Re-imbursement can in no way be construed as Income, deduction of tax at source from re-imbursement is contrary to the basic tenets of Income tax. Hence, it is important that the re-imbursement component of a payment be excluded from the value considered for deduction of tax at source.

G )      MAT - Section 115-JB:

The philosophy of charging a minimum tax with reference to Book Profits needs reconsideration in the context of the companies in the Infrastructure Sector.It is true that all profitable companies must contribute to the finances of the Government by way of income tax.  But, this needs consideration in the context of companies providing infrastructure in as much as these companies are also serving a higher national purpose.

An alternative which the Finance Ministry can consider is to provide that such companies would be liable to tax on Book Profits (MAT) only if their Return on Capital Employed is in excess of specified percentage, say, 16% (generally considered to be normal or reasonable return for companies providing infrastructure).  This would encourage investment in these sectors, including the Telecom Sector and would still ensure that companies do contribute to the Government if they make windfall profits.

  H )      Section 115(O) Tax on distributed profits of domestic companies with   respect of companies availing tax holiday U/s 80 IA:

The present provisions stand as follows:

Any amount declared, distributed or paid by a company covered u/s 80IA by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2003, whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate 12.5%.

Even if no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on distributed profits under sub-section (1) shall be payable by such company.

The tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends and no further credit therefore shall be claimed by the company or by any other person in respect of the amount of tax so paid.

No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) or the tax thereon. 

This provision is not in line with the Government commitments on promoting sectors covered by section 80IA. Hence, such distributed profits should be exempted from tax.

I )       Restoration of benefit under section 80HHE

Section 80 HHE of the Act provides for deduction in respect of profits from export of computer software and providing technical services outside India in connection with the development of software. CBDT, through a notification, has specified that deduction under section 80HHE shall also be available for Call Centers, Back Office Operations, Data Processing etc. However, deduction under section 80HHE has been discontinued from the assessment year 2005-06.

India has emerged as one of the main country which has started providing efficiently and robustly BPO services, Call Center services and in recent times many Indian companies have emerged as very important and main players in providing these services. Some of the companies have started their services only recently.

Considering the important nature of these services for India and also their recent start ups, it is important that the Government continues to provide them fiscal benefits so as to enable them to provide services at competitive rates.

In view of the above it is prayed that benefit under section 80HHE be restored to its earlier levels.

J )        Clarifications regarding tax treatment in case of amalgamation and demerger.

Globally telecom industry is undergoing a spate of consolidation and restructuring. Prominent amongst these restructurings are 'merger' and 'demerger'. During such restructuring, it is important that the tax attributes are allowed to be carried forward and tax benefit availed of.

The Income Tax Act defines 'amalgamation' under section 2(1) B and 'demerger' under section 2(19)AA. The tax benefits are available only if the arrangement conforms to the conditions stipulated in these sections.

In case of mergers, not satisfying the condition stipulated u/s 2(1) B, Capital Gains are applicable even in case of equity payouts ( Share swaps). This is in view of the Apex Court judgment in the Grace Collis case. Determination of market value of shares allotted in case of unlisted companies is difficult and can lead to considerable ambiguity regarding the method of valuation.

Many countries world wide follow the practice of rolling over the capital gain tax in case of equity pays out till such time the equity is sold. It is suggested that provision for Capital Gains rollover be introduced in case of equity swaps rolling over the tax liability, till such time the equity is sold.

Definition of 'Demerger" is covered u/s 2(19) AA. The meaning of the term 'undertaking' is inclusive and not exhaustive. This could lead to ambiguity and consequent litigation.

The meaning of the term 'Undertaking' u/s 2(19)AA should be made elaborate so as to avoid ambiguity. This will enable organic restructuring to take place smoothly.

VIII.   International Taxation Issues

A )  Taxes on software & Bandwidth payments

For providing telecommunication services, bandwidth and software are both crucial and essential components. For international long distance calls, bandwidth is generally acquired from foreign companies and telecommunications service providers are almost entirely dependent upon software imported from foreign countries.

In the current Indian scenario payments for acquiring of both the above are subjected to an illogical taxation regime that ends up burdening the companies far more than what they should be paying.

Bandwidth

The Income tax authorities have been treating the payments for such international bandwidth as royalty income of the foreign suppliers and are therefore subjecting the same to TDS. However, this is not the right approach.

Bandwidth essentially involves connecting points through which communications become possible. A user utilizes this bandwidth for transferring data or voice up to a specified capacity. It does not involve carrying out of any works contract or providing of any technical services.

In the case of Skycell Communications Ltd. V DCIT (2001) 119 Taxman 496, the H'ble Madras High Court has held that for the purpose of section 194J of the Act to become applicable, it is necessary that the payee receives 'services'. If the payee uses only technical gadgets, which are made available to others also for fees, the same does not make the payment subject to tax deduction at source under section 194J of the Act.  The H'ble Bangalore Tribunal recently in case of Wipro Limited also upheld the above views and held that bandwidth charges payable to a foreign company cannot be subject to TDS either as royalties or as fees for technical services.

Also, acquisition of the Bandwidth does not involve acquiring rights or rights to use any copyright of literary, artistic or scientific work, any patent, trade mark, design, model, plan, secret formula or process. Further, it does not involve hiring of any industrial, commercial or scientific equipment, as the bandwidth cannot be taken into physical custody.

It is clear from the above that TDS provisions should not apply on bandwidth charges. And if this is removed, the overall costs would come down thus benefiting consumers as a whole.

Software

Further, in the absence of any clarification on taxability of software payments from India, the tax departments have been treating such software payments as royalty income of a foreign company and directing the Indian companies to withhold tax on such royalty payments. As per section 115A of such royalties are subject to tax @ 20%.

This is an anomaly because most the software so purchased are off the shelf or shrink-wrapped software and not necessarily customized or tailor made. Globally, such software is sold to the buyer through royalty-free, perpetual licenses. In a landmark judgment, a five judge bench of the Supreme Court upheld the Andhra Pradesh High Court's judgment holding that Computer Software was goods liable to sales tax. The question before the Constitution Bench was "whether the software sold by Tata Consultancy Services can be termed to be goods and as such liable to sales tax. The Court discussed in detail the definition of "goods", "sale", "tangible and intangible property" and came to the conclusion that software is goods indeed. In view of this judgement software should be excluded from the purview of Royalty payments and should not be subject to withholding taxes under section 195 of the Income tax Act.

Since withholding of taxes is generally to be borne by the Indian companies, treating software payments as royalties puts an additional burden of withholding tax on the Indian companies adding to the costs of projects. For expansion and keeping pace with the changing telecom scenario, software imports are a prime necessity and the burden of withholding tax is a severe drain on the investible funds in India.

Internationally, software acquisition is treated as acquisition of a copyrighted article and not the copyright itself. The Internal Revenue Services, USA agrees with this view and accordingly software acquisitions are not considered as royalty income of the software supplier by them. Adopting the same view in India would be in line with such international practice.  

Thus it is important that a clarification is issued that software payments to foreign companies are treated as business income and not royalty income and hence not subjected to withholding tax in India.

Anomalies arising out of the current Tax / TDS structure. The rates of withholding tax on incomes from royalty and technical fees paid to foreign companies are 10% under section 115A read with section 195. If the taxes are to be borne by the foreign companies, then withholding taxes are held back as 10% of the remittances paid to the foreign companies as royalty or technical fees.

Example:

Let us suppose the fees or royalty to be remitted is Rs 100.

Of this, Rs. 10 is withheld as TDS.

Now, Income Tax is essentially a tax on the net income and not on the receipts. Since the tax rate on foreign companies is 40% then tax of Rs. 10 implies that the net profit earned by the company is Rs 25, which translates to a net profit ratio of 25% on the gross receipts of Rs. 100. This is an excessively high net profit ratio. No foreign company can have this kind of profits.

The normal range of net profit ratio even for highly profitable companies is not more than 10-12%. Forty percent of this would be 5-6% at the most.

Under the current system 10% is being withheld. This creates an undue burden on the foreign company and they are reluctant to trade with us. Hence, they shift the burden of the withholding tax on the Indian companies and that increases the costs of project for the Indian companies. Since the tax is to be 'grossed up' in this case, the Indian companies will be paying tax of Rs. 11.11, taking the total costs for the Indian companies at Rs. 111.11, which ultimately gets passed on to the consumers.

It is thus important that software payments as well those for bandwidth should be taken out of the purview of Royalty or Technical Services and instead be considered as Business Income.

In such a case, as per the Double Taxation Avoidance Treaty there will be no withholding tax and the foreign company will be charged to tax only on its net profits in the home country.

B )     Restoration of Exemption in respect of taxes on royalty &    fees to a foreign company for technical services.

Section 10(6A) of the Act provides that where in the case of a foreign company derives income by way of royalty or fees for technical services from Government or an Indian concern and tax on such income is payable by the Government of India or the Indian concern, then such tax would be fully exempt from income-tax in India on fulfillment of certain specified conditions.

Purpose of the above section was to encourage Indian concerns to obtain technical services and user rights for advanced and ultra modern technologies from foreign companies having expertise in the subject areas. However, the benefit of this exemption has been removed, which leads to an increase in costs for Indian concerns. Most of those types of agreements require the Indian concern to bear the burden of withholding tax. India still requires technical services and modern technologies from the developed countries especially in telecom sector which is still undergoing development. Hence, restoring the exemption would go a long way in reducing the costs for the telecom sectors and costs saved could be used for further investments.

C )       Clarification with respect to International roaming agreement.

With India integrating into the Global economies, it is essential that Indian Telecom operators enter into Global roaming agreements with international operators. These agreements often reach a stumbling block, over the lack of clarity over whether withholding taxes u/s 195 is applicable on such payments. While the issue with regard to domestic payments under section

* 194J has been put at rest with the Madras High court Judgment in the Skycell case (Sky cell Communications Ltd. v. Deputy Commissioner of Income-tax [2001] 251 ITR 53 (Mad)), the international operators are very concerned over a lack of clarity on this issue u/s 195.

 A clarification resolving this issue in line with the sky cell judgment, that such payments do not amount to 'Fees for Technical Services', would considerably assuage their fears and go a long way in furthering such international business partnerships with Indian Telecom Service providers.