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Budget Blues: Industry reacts with restrained disappointment

August 07, 2019
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By Devangshu Datta

The first budget of the new government (NDA-II) left the beleaguered telecom industry disappointed. Stakeholders in the sector were hoping for some financial incentives and the clarification of some grey areas to help them cope with high debt burdens and low margins.

Two of the three private service providers, Bharti Airtel and Vodafone Idea are making losses and struggling to deal with their debt, while the PSU units, Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited, have huge accumulated losses. Even market leader Reliance Jio Infocomm Limited already has a high debt level and is looking to pump in more funding. The industry is also bracing for 5G spectrum auctions, and the Telecom Regulatory Authority of India has indicated that it will set a high base price.

On the positive side of the ledger, there is a reiteration of the focus on artificial intelligence (AI), big data and robotics, which should create more demand for services. There is also some relaxation in the foreign direct investment norms for single-brand retailers, which may benefit global smartphone players such as Apple, OnePlus and Samsung. In turn, that could drive smartphone adoption and demand for data.

Fintech continues to be an area where growth is likely to be encouraged, creating demand for telecom services as digital payments become more popular. There is a rural thrust with government plans to use the Universal Service Obligation [USO] Fund corpus to speed up the BharatNet programme to boost rural broadband penetration under the public-private partnership (PPP) model. (The USO Fund is an independent body within the Department of Telecommunications [DoT] that subsidises telecom infrastructure development across rural India.)

However, the industry had many pressing expectations from the government, in terms of clarification of taxation terms and rates. Those have not been met since the budget is clearly focused on raising revenues in the short term.

As per the estimates in the budget, the government expects a 28 per cent increase in non-auction revenue from the telecom sector at Rs 505.19 billion during 2019-20, compared to a revenue of Rs 392.45 billion during the fiscal year ended March 31, 2019.


Industry expectations on the tax front

One industry plea was that service providers should be allowed to carry forward minimum alternate tax (MAT) credits beyond the normal 15-year lifespan until such time as MAT can be fully adjusted against profits. Another plea involved withholding of taxes from distributors’ margin on SIM cards and prepaid vouchers. Service providers transfer the usage rights to distributors at a discount. The industry contention is that this is not a commission and these transactions should not attract withholding tax, or that such taxes should be levied at low rates, if at all required. At the very least, clarity should be provided on this. The budget did not offer relief in these areas.

There was also no indication that the long-standing demand that GST on tariffs be reduced from the current 18 per cent to a more reasonable 12 per cent would be considered by the GST Council. There are also large GST input tax credits accumulated and unrecovered, and the Council could expedite the adjustment of such credits. Moreover, towers are treated as immovable property and are not eligible for input credits for GST. However, the budget did not provide any indication that this policy could be favourably reviewed.

Another area of controversy is the taxation of interconnection usage charges (IUC) paid by Indian telecom operators to foreign telecom operators. Tax is levied on the basis of royalties/fee for technical services. Since the IUC paid by overseas operators to Indian service providers is not taxed abroad, the contention is that these charges should not attract taxes in India as well.

In addition, the industry was hoping to receive infrastructure status, which would allow it to import capital goods without attracting high customs duties. However that hope has been belied and indeed, import costs are likely to rise as the duty on optical fibre has been hiked.

The budget could also have played some role in persuading the states to streamline RoW implementation for network roll-outs. When it comes to RoW implementation, transactions between local bodies and service providers should not be subject to tax, and clear guidelines in this regard would have been helpful.

The next big expense could be the upcoming 5G auctions. The industry contends that the base price set for 5G auctions, at around Rs 4.92 billion per MHz, is far above the prevailing global levels. However, it is possible that the government will allow a longer period, of up to 16 years, for payment. This would ease the burden somewhat, but bidding at these levels may be economically unviable since 5G is also to be deployed for low-margin social purposes.

Overall, the industry is looking at a situation where it earned revenues of roughly Rs 2.3 trillion in 2018-19 while having an outstanding debt of Rs 5 trillion (and another Rs 3 trillion for spectrum charges and licence fees) to be serviced. This is unsustainable, unless profitability improves dramatically.

 
 
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