Facing tough times since November 2010, the telecom sector had pinned its hopes on the Union Budget 2012 to ease some of the pressure. It, however, failed to do so.
One of the key expectations had been according infrastructure status to the telecom industry. This would have qualified it for income tax exemptions for overseas borrowings and made it easier for the cash-strapped telecom operators to obtain credit from domestic banks. On behalf of the sector, the Department of Telecommunications too had lobbied for infrastructure status and tax cuts, but it failed to cut ice.
Telecom players have been requesting the government to lower taxes for a long time. Tax levies in India are among the highest in the world, which, according to the industry, are affecting its investments and revenues. The industry has also been pushing for 100 per cent tax exemption and tax holidays for new roll-outs under Section 80IA of the Income Tax Act as well as rationalisation of the value-added tax. However, the budget failed to meet most of these demands.
According to a statement issued by the Cellular Operators? Association of India (COAI), ?The budget does not address critical issues related to the telecom as well as infrastructure sectors. There are no major takeaways for the industry.?
What will hurt the industry most is the increase in service tax from 10 per cent to 12 per cent. The finance minister hopes mobilise about Rs 186 billion as additional revenue from the proposed increase. However, this will have an adverse impact on the industry and users. ?The telecom sector is already burdened with multiple high tax levies that account for 30 per cent of the telecom services revenue. The rise in service tax would increase the cost of services and impact the profits and losses of telecom companies. As a highly taxed industry, this will certainly have a further impact on the consumer,? says Sanjay Kapoor, chief executive officer, India & South Asia, Bharti Airtel Limited.
The COAI concurs. ?Contrary to the recommendations put forth by the industry, no tax relief or benefits have been granted to the telecom industry, which is reeling under rising operating costs and sharply declining margins. Moreover, the increase in service tax would affect the growth of the industry as it is detrimental to the objectives of rural penetration and providing affordable rates for consumers. The increased costs would eventually be borne by consumers in the form of higher charges for services. It is very disheartening that there are still no provisions to support the industry, which has been acknowledged as a vital contributor to the nation?s economic health.?
Another proposal that has come in for strong debate is the move to retrospectively tax overseas transactions involving local assets. This will particularly impact companies like Vodafone.
The industry is also disappointed that there was no mention of imminent broadband service roll-outs. However, this is likely to be addressed in the forthcoming National Telecom Policy (NTP), which is expected to be announced by June 2012.
The budget, however, has a few positives for the sector. It has proposed that mobile phone parts and memory cards be exempted from basic customs duty. This move is likely to bring down handset manufacturing costs, which would, in turn, help increase mobile phone usage in the country.
Further, no change has been proposed in the minimum alternate tax limit, which stands at 18.5 per cent, corporate tax rates and peak customs duty.
The budget has also suggested that telecom towers be eligible for viability gap funding (VGF), apart from increasing infrastructure investment in the Twelfth Plan to Rs 50 trillion (half of which is expected to come from the private sector). According to the COAI, ?Infrastructure funding for cellular towers, optic fibre cables and other telecom cables will be provided through VGF, which seems positive as it is expected to bring down the operating capital expenditure considerably.?
Besides, the government has promised a $1 billion venture capital fund for micro, small and medium enterprises, which would aid in setting up the ecosystem for new companies. Further, the budget has proposed the removal of sectoral caps on venture capitalists to promote innovation.
Apart from these concessions, the budget has very little to offer to the telecom industry. The sector is now awaiting the release of the NTP guidelines to resolve the issues facing it.
