The Union Budget for 2016-17 has brought in a renewed focus on the telecom sector, in line with the government’s recent efforts to bring regulatory clarity in the sector. The key highlights include clarity over service tax on spectrum, tax incentives on domestic manufacturing of mobile handsets, and an increase in the allocation of funds for major telecom infrastructure projects. While these initiatives are set to facilitate growth in the sector, the government is hoping to meet a greater proportion of its fiscal deficit through the telecom industry’s revenues, primarily through the upcoming spectrum auction. Thus, telecom remains a key contributor in meeting the fiscal deficit target rather than a receiver of budgetary allocations to encourage growth.
tele.net takes a look at the key takeaways from the budget for the telecom sector and their likely implications…
Budget allocations
Under the latest union budget, the plan outlay for the Department of Telecommunications (DoT) has been set at Rs 58.65 billion. This reflects a marginal increase over the previous year, when the total allocation for DoT was Rs 52 billion, with a revised estimate of Rs 57.95 billion. The present budgetary allocation includes Rs 0.17 billion towards regulatory bodies (the Telecom Regulatory Authority of India General Fund and the Telecom Disputes Settlement and Appellate Tribunal); Rs 27.55 billion under the Universal Service Obligation Fund; and Rs 3.03 billion for DoT projects. Notably, Rs 27.1 billion has been allocated for the Network for Spectrum project, which aims to provide optical fibre connectivity to the defence forces.
Meanwhile, state-run Bharat Sanchar Nigam Limited is set to receive Rs 22 billion as a refund for the 4G and CDMA spectrum it has surrendered. The other state-run operator, Mahanagar Telephone Nigam Limited (MTNL) will receive a total support of Rs 4.28 billion, including a refund for the 5 MHz of spectrum that it surrendered in the Delhi and Mumbai circles. The support also includes a minimum alternate tax (MAT) refund and the payment of interest on bonds. During 2015-16, MTNL received about Rs 4.92 billion as MAT. Meanwhile, Rs 0.8 billion has been kept as financial support for reviving Indian Telephone Industries Limited.
Domestic manufacturing incentives
As per the Indian Cellular Association, the value of mobile phone production in India is expected to cross Rs 400 billion in 2016-17. The same was recorded as
Rs 189 billion during 2014-15. Apart from this, it is estimated that over 30,000 new jobs have already been generated in this industry in the past seven to eight months owing to efforts made under the Make in India initiative.
Under the Union Budget 2016-17, the government has waived basic customs duty (countervailing duty) and the special additional duty on chargers, adapters, batteries, wired headsets and speakers for mobile phones has been withdrawn. This will help make domestically produced handsets competitive with low-cost imported handsets. Apart from this, import duties on inputs used in the making of such parts and components have also been removed, giving a further boost to local manufacturing. This announcement has had a positive reception. Rahul Agarwal, managing director, Lenovo India, states, “We are happy that the budget establishes a strong emphasis on technology in almost all development areas. Make in India and Digital India remained important items on the agenda in the budget this year.” Commenting on the policy moves to encourage domestic manufacturing, he adds, “The changes in customs duty and excise duty rates on components and subcomponents reaffirm the Make in India vision of the government. This will help build a robust component ecosystem in the country, which is very important for making it a manufacturing hub.”
Meanwhile, Pankaj Mohindroo, national president, Indian Cellular Association, states, “Domestic manufacturing will attract only 2 per cent excise duty while imports will face 29.441 per cent duty, giving a 27.441 per cent protection to domestic manufacturers vis-à-vis importers. In addition, a broad category of inputs, including parts, components and subparts have been exempted from excise as well as countervailing customs duty when used for manufacture.”
Moving towards regulatory clarity
The finance ministry has proposed to amend the Finance Act, 1994 to declare the assignment by the government of the right to use radio frequency spectrum and its subsequent transfers a service. The government has clarified that the assignment of the right to use spectrum is a service on which service tax is to be levied and it should not be considered as the sale of intangible goods. Earlier, there was ambiguity regarding whether spectrum trading deals came under the ambit of service tax or under value added tax (VAT).
A company paying service tax will be able to avail of its benefit in its tax liability, which will ultimately be credited back. According to Vishal Malhotra, tax partner, telecom practice, EY, “The clarification that the consideration of sharing and trading of spectrum will be liable for service tax is a huge positive, though it still needs to be seen whether states adopt a consistent position as regards the levy of VAT on such transactions.” The industry expects this move to encourage more spectrum-related transactions.
Apart from providing clarity on the imposition of service tax on spectrum, the finance ministry has proposed a new dispute resolution scheme in cases of retrospective taxation. This allows tax arrears to be paid in lieu of interest liabilities in cases of retrospective taxation. The proposal is expected to help resolve Vodafone’s Rs 200 billion pending tax dispute with the Indian government. Malhotra further adds, “The introduction of dispute resolution and settlement provisions will again be a positive and should help reduce the litigation facing this sector.”
On the downside, the Finance Bill, 2016 has proposed to amortise spectrum fees rather than allow tax depreciation. The industry is of the view that this could result in ambiguity and litigation risks, thereby leading to a negative impact on the cash flow of operators. Earlier, operators were largely looking at spectrum as an intangible liable for tax depreciation.
Spectrum transactions will play an important role in the strategies of small and large operators in terms of improving their market standing. The regulatory clarity offered in the budget proposals will assist operators in making such decisions.
Encouraging digital literacy
In addition to the above measures, the government is planning to increase its efforts under the Digital India initiative. It is planning to launch a new Digital Literacy Mission Scheme for rural India to cover around 60 million households within the next three years. Apart from this, the finance ministry has proposed the creation of a digital depository for school-leaving certificates, and school and college marksheets. This will provide a platform for storing these documents safely and enable their easy retrieval. This digital depository can also be linked with a person’s Aadhar number as there is already a digital locker linked to that. Several Indian telecom players are likely to play an important role in providing digital literacy and accomplishing the ministry’s targets.
The way forward
Overall, the budget proposals for the telecom sector have been positive. The more pressing matter is the level of revenues estimated from this industry for 2016-17. The government expects revenues of
Rs 989.95 billion from the spectrum auction, licence fees and one-time spectrum charges in 2016-17. This is about 76 per cent higher than the revised estimate for 2015-16, which is about Rs 560.34 billion. To achieve this target, the upcoming spectrum auction must witness greater participation and success in comparison with the one held in March 2015. Moreover, telecom operators will be required to simultaneously make spectrum payments from previous auctions during 2016-17.
All these factors could cause operators to revise their tariffs upwards to boost revenue and meet their recurring expenditures. Going forward, spectrum transactions will play an important role in the strategies of small and large operators in terms of maintaining or improving their market standing. The regulatory clarity offered in the budget proposals will assist operators in making such decisions. The resolution of issues pertaining to retrospective taxation will be a much-needed respite in an industry where litigation issues play an important role in determining the investment climate. Encouraging the domestic manufacturing of telecom equipment and mobile handsets will assist in the telecom industry’s transition to a data-led growth model.
Shambhavi Sharan
