In the run-up to the Budget 2006-07, the finance ministry is believed to be considering streamlining the multitiered tax structure being followed in the telecom sector. The thinking is that merging the several existing levies into a maximum of three levies over the next few years, and then eventually reducing it to a single-tax regime in five to 10 years’ time would encourage telecom growth.
To this end, there have been several representations to the finance ministry from operators, telecom associations and the regulator.
Currently, the telecom sector has as many as eight different levies including access deficit charge (ADC), revenue share licence fee, spectrum charge, sales tax on services, service tax, education cess and universal service obligation (USO). In addition, there is an import duty of 16 per cent on infrastructure and 5 per cent on handsets.
The Telecom Regulatory Authority of India (TRAI) recently calculated that the total levies on the sector currently amount to about 21 per cent of the adjusted gross revenue (AGR) of telecom companies. TRAI also estimates that in the current fiscal year, the mobile sector will have to rustle up nearly Rs 180 billion in licence fees and other taxes. This figure is expected to escalate to over Rs 250 billion in the next fiscal year.
Indeed, India’s telecom taxes, which range between 17 and 26 per cent, are amongst the highest in the world. Consequently, customers end up paying more than 30 per cent of their phone bills as taxes. This is in spite of the fact that India’s tariff rates are amongst the lowest in the world.
Analysts feel that further growth in the telecom sector can be expected only if the taxes and levies are reduced and brought in line with international standards. Delhibased telecom analyst Mahesh Uppal says, “As TRAI’s paper has clearly indicated, telecom taxes in India are amongst the highest in the world and given the strat gic role that telecom can play in the country’s growth, taxes should be brought in line with international best practices.”
A comparison with countries like Pakistan, Sri Lanka and China (see table) shows that the total telecom tax in India is much higher than the others. China, for instance, pays about 3.5 per cent of its telecom revenue in tax while Pakistan pays about 2.5 per cent plus goods and services tax (GST).
One of the highest duties that the Indian telecom sector is saddled with is the revenue share licence fee, which currently goes up to 10 per cent of the AGR, depending on the circle. Industry bodies like the Association of Unified Telecom Service Providers of India (AUSPI) and the Cellular Operators Association of India (COAI) have been demanding a reduction in the licence fee for quite some time now. In fact, the regulator, in its recommendations on a unified licensing regime, had proposed a reduction in the revenue share licence fee, to a maximum of 6 per cent (5 per cent for the USO Fund and 1 per cent as administrative charge) of AGR, with no revenue share or entry fee for a number of services. The recommendations are now being reviewed by the finance ministry.
Meanwhile, in a strategy paper on the telecom sector released by the finance ministry in January 2006, it has been recommended that interest income, dividend income and handset revenues should not be included in calculating the AGR and if included, should be offset against the interest paid on borrowed funds. It also says that the revenue from the sale of capital goods and from sharing or leasing of infrastructure should be excluded from the calculation of the same.
Based on the strategy paper, the industry has come out with studies and presentations citing that the enforcement of a cut in the licence fee will actually increase the tax collections of the government.
The logic of the industry bodies is that a reduction in levies such as the licence fees would encourage higher growth rates, tariff cuts and increased revenues for service providers. This would translate into higher tax collections for the government in the form of service tax. Thus, revenue forgone on account of the licence fee cut would be compensated for by an increase in the amount of service tax collected.
In a pre-budget presentation, the service providers envisage a situation where the licence fee is reduced by 3 per cent. This would cause the subscriber base to go up by almost 65 per cent to 133 million and total revenues from the sector to reach Rs 593.7 billion in 2006-07. The service tax collection in this scenario would be Rs 59.4 billion.
Further, the operators showed that if the licence fee were to be cut by 5 per cent during fiscal year 2006-07, the government’s revenue from licence fees and service tax would rise to Rs 85.42 billion against the projected figure of Rs 66.16 billion for 2005-06.
Under a 1 per cent reduction, there would be a 30 per cent increase in tax revenues to Rs 89.05 billion in 2006-07. The sector would witness a 55 per cent increase in the subscriber base and total annual revenues of Rs 367.5 billion during fiscal year 2005-06. In 2006-07, it would witness a 57 per cent growth in subscriber base and an increase in total annual revenues to Rs 569.4 billion.
As a solution to simplify the intricate tax structure, the operators had earlier proposed that the service tax be hiked from the present 10 per cent to include the various duties in its fold and the proceeds be shared amongst the USO, ADC, the Department of Telecommunications and the Ministry of Finance. However, the Ministry of Communications turned down the proposal, pointing out that a part of the service tax collection is shared with the states and hence cannot be altered.
Also, operators have been demanding a 10-year tax holiday for telecom service providers as opposed to the existing five years. This, they expect, would bring the sector at par with other core infrastructure areas like power and roads. Under Section 80-IA of the Income Tax Act, companies in the infrastructure sector such as power, roads and ports, can avail of 100 per cent tax exemption for a period of 10 consecutive years. However, in the case of telecommunications, the exemption is applicable for a period of five years only.
The rationale for this is that the amount of investment required in the telecom sector is smaller compared to other core infrastructure areas. Also, returns on investment materialise much faster in telecommunications than in other sectors.
However, the industry feels that the lack of a longer tax break prevents service providers from investing in upgradation and expansion of their networks, which is a prerequisite in telecom and must be done continuously. Operators say that 100 per cent tax exemption for 10 successive years will leave them with sufficient funds for reinvestment in their businesses and expansion of networks, thereby allowing them to take their services to the remotest parts of the country at affordable prices.
In all, as S.C. Khanna, secretary general of AUSPI, says, “The private and public sectors are together now adding subscribers at the rate of 5 million per month. Phones are reaching sections of the country where some time back people deemed it impossible to possess mobile phones. This is happening because tariff rates have fallen drastically. While volumes are increasing, profit margins are going down. We are taking the initiative, but we need breathing space too. Hence, taxes must be reduced.”
On the proposed cut in licence fees, he says, “The industry, the regulator and the Ministry of Communications have all recommended a reduction in the revenue share licence fee. The prerogative now rests with the government to make it a reality.”
