The Union Budget 2005-06 ? finance minister P. Chidambaram’s second in 12 months ? has raised expectations all around. It is expected to provide an impetus for infrastructure development, growth and employment creation. It is expected to open up the economy further. For the telecom industry, it is expected to be particularly beneficial. Analysts believe that the government’s long-term focus on infrastructure development will eventually create a conducive environment that will increase teledensity and take telephony to the rural areas.

The markets have already reacted favourably to the budget, which is being perceived as more than fair. It endorses the government’s mandate to continue the reform processes started earlier. It assures investment in agriculture, in meeting the basic needs of rural India and in social sectors like education and primary health care. The budget also emphasises the need for an added thrust to high-growth areas, especially IT and telecommunications. The emphasis and financial commitment to “Bharat Nirman” ? a comprehensive project to improve connectivity, phone links, and electrification and irrigation facilities in rural India ? is also finding wide favour.

The telecom industry has enthusiastically welcomed the initiatives outlined in the budget. Says Bharti’s Sunil Mittal: “I am very pleased that there has been a major thrust at growth and development in this budget. The telecom industry is on the verge of an exciting period of growth and development with the increase in the FDI limit. The budget proposals put forth by the finance minister will take it further.”

Budget proposals
At a glance, here is what the budget has to offer for the telecom industry:

  • Removal of cellular subscribers from the one-of-six (1/6) criteria for filing incometax returns.
  •  Zero per cent duty on mobile handsets.
  •  Customs duty on specified capital goods and all inputs for manufacture of IT Agreement (ITA)-bound items to be removed.
  • Countervailing duty (CVD) of 4 per cent on import of ITA-bound items imposed. ? Zero per cent duty on components for manufacturing telecom equipment.
  •  Depreciation on plant and machinery reduced from 25 per cent to 15 per cent.
  • Government’s contribution to USO Fund increased.
  •  Special additional duty of 4 per cent on components.

Implications for the sector
The rapidly growing telecom sector requires substantial investment to upgrade telecom infrastructure and services. This concern has been addressed in the budget, whereby duties on the import of components and raw materials for telecom equipment manufacturing have been removed.
This is expected to result in a fall in the price of telecom equipment.

Equipment manufacturers are the obvious gainers. Also, since capital goods used in telecom networks will carry zero import duty, this will help manufacturers further. Equipment manufacturers like Himachal Futuristic Communications Limited (HFCL), Alcatel, Siemens, Birla Ericsson, and ITI are therefore in good cheer.

On the other hand, domestic equipment manufacturers will have to pay 20 per cent import duty on inputs required to make these items. “In this respect, by removing the inverted duty structure, the budget ensures a level playing field between domestic manufacturing and imports,” says Mahendra Nahata, managing director of HFCL.

In the manufacturing segment, telecom cable manufacturers will gain substantially as input costs will drop by at least 13 per cent. Jelly-filled cable manufacturers, for instance, pay 15 per cent duty on copper imports at present and 20 per cent on plastic imports. With the duty on these items coming down to zero, manufacturers can expect to book profits.

“This budget will help India become a manufacturing destination for telecom equipment,” says Ravi Sharma, president, Alcatel (South Asia) on the perception, shared by market analysts, that multinational telecom companies will now find the Indian market attractive to invest in.

For the cellular industry, the good news is that users of mobile phones have been taken off the 1/6 scheme for filing incometax returns. The finance minister noted: “Subscribers of cellular phones will no longer be required to file their returns if their income is below the maximum amount not chargeable to tax.” This relaxation is expected to pave the way for increased usage of mobile phones. Also, mobile telephony should get a push with the proposed removal of duty on mobile handsets and hence lower prices. The 4 per cent CVD notwithstanding, there should be a reduction in the current cost structure.
According to the industry, the reasonable tariff structure is aimed at keeping a check on the grey market and increasing handset sales through legal channels.

The budget points to the low teledensity in the country at 8.75 per cent. It also expresses concern at the low level of rural teledensity. The budget sets a positive tone for development of rural infrastructure through buoyancy in investment, which is expected to trigger a demand for better communication. Project Bharat Nirman has been given the shape of a four-year business plan. Otherwise, a budgetary allocation of Rs 12 billion has been provided for 2005-06 for the Universal Service Obligation (USO) Fund to provide telephone connectivity in remote and rural areas. So far, the government has released Rs 17 billion to the USO Fund, which has been fully utilised.

For corporate India, the reduction in corporate tax from 35 per cent to 30 per cent and the rationalisation of other duties and taxes are seen as positive steps. The rationalisation of customs duties, especially abolition on ITA-bound items, will give a boost to the infrastructure sector. Under the IT Agreement, customs duties on 217 items will be cut to zero, effective March 1. However, a 4 per cent CVD on the import of ITA-bound items has been imposed.

The sector will also benefit from reductions like the depreciation on plant and machinery, from 25 per cent to 15 per cent, and customs duty on capital equipment from 20 per cent to 15 per cent. Meanwhile, clarifications on the application of service tax will help remove ambiguity in this area.

The only concern that the industry has voiced post-budget is the levy of a special additional duty of 4 per cent on components. Earlier, these components attracted zero duty. Manufacturers are therefore unsure as to how much it would increase their overall manufacturing costs. Companies like LG Electronics India, which is in the process of setting up a facility to manufacture GSM handsets, feel that they will now have to review their economics and are planning to seek some clarifications from the government.

In all, the 2005-06 budget gives a clear signal of the government’s continuing focus on reforms, infrastructure development and on attracting foreign investment. It reflects stability in its fiscal policies, which will not only create positive sentiment among domestic companies but also bring in higher overseas investments.

Industry Speak 

Sunil Bharti Mittal, Chairman and Group Managing Director, Bharti Enterprises
This is a well-thought-out budget with an eye on infrastructure development, growth and employment creation. The budget attempts to simplify income-tax laws and open up the economy further. A number of welcome steps have been taken to encourage growth and development of the rural sector. Creation of a rural electricity distribution network and schemes for the development/ strengthening of agricultural marketing infrastructure, grading and standardisation are certainly steps in the right direction. We are today at the threshold of another revolution in the agricultural sector and hence, all measures to modernise, encourage and grow this sector must be undertaken. The finance minister’s endeavour to boost job generation in sectors such as IT and textiles and convert Mumbai into a major global financial hub is also welcome. The financial commitment to “Bharat Nirman”, a comprehensive project to improve connectivity, phone links, electrification and irrigation facilities in rural India, also deserves accolades.

In the telecom sector, the removal of mobile subscribers from the criteria for filing income-tax returns, a long-standing demand, has been met. The telecom industry is on the verge of an exciting period of growth and development with the increase in the FDI limit and the budget proposals put forth by P . Chidambaram.

Vikram Mehmi, CEO, Idea Cellular
The Union Budget 2005-06 is a growth-oriented budget and sets a positive tone for development in rural India through buoyancy in investment. This is expected to trigger a demand for communication. The industry is already looking forward to going into its next phase of expansion, into the rural areas. The removal of mobile phones from the 1/6 requirements for filing of income-tax returns will also remove entry barriers for a section of potential mobile customers, which is positive for improved teledensity.

Similarly, provision of Rs 12 billion for the USO Fund will increase demand for telephony in the rural areas. With this, the target of 250 million phones can be achieved much earlier than expected.

Further, clarifications on the application of sales tax vis-?-vis service tax would have removed ambiguity in this area. The reduction in corporate tax of 5 per cent and the support of the services sector are indeed welcome.

I see this as a fiscally judicious budget that is all-encompassing and as per our expectation. Overall, the economy is looking up and India will soon be Asia’s most attractive investment hub.

Kobita Desai, Principal Analyst, Gartner
We observe that telecom network expansion and coverage have been given due weightage. There is a defined roadmap to fulfil the socio-economic responsibility associated with telecommunications with guidance on universal service obligation, especially allocation of the necessary funds.

By removing mobile phones as a criterion for filing income-tax returns, it is likely to assuage the concerns of prospective users, quite possibly resulting in people being receptive. However, we don’t have tangible evidence to support the fact that it will fuel growth. More important, such steps often help to allay negative perceptions and create a more liberal environment.

Umang Das, Managing Director, Spice Communications
We welcome the announcements made by the finance minister in the Union Budget 2005-06. The government has undertaken positive steps to ensure further growth in the telecom sector, to empower endconsumers with affordable telecom solutions.

The move to remove cellular subscribers from the 1/6 criteria for filing income-tax returns is an enabling factor for mobile penetration and achieving high levels of teledensity.

The zero per cent duty on mobile handsets is a step in the right direction in spite of a CVD of 4 per cent, and would enable a reduction in the current cost structure. The zero duty on capital equipment and other inputs will bolster domestic manufacturing, increase access and enable operators to extend affordable telecom solutions to consumers.

The long-term focus of the government on infrastructure development is bound to create a conducive environment for achieving high levels of teledensity in the rural areas and reaching out to remote towns and villages.

We strongly feel the announcements made in this budget will create an equitable platform for telecom players thus ensuring a progressive and growth-oriented environment within the industry.

Archana Sasan, Telecom Desk, Kochhar & Company
The increase in the FDI in the telecom sector from 49 per cent to 74 per cent was a welcome move for the advancement of the telecom sector in India, which requires substantial investment to upgrade telecom infrastructure and services. The budget proposals will provide a further boost to this sector. The proposals are pragmatic and should encourage service providers to expand their networks/infrastructure in order to cover a larger area, including the rural belt. This should hopefully increase the teledensity of the country. Mobile telephony should also receive an impetus with the proposed reduction in mobile handset prices. Overall, it appears to be a favourable budget vis-?-vis the telecom industry.

Sanjeev Sharma, Managing Director, Nokia India
The budget clearly shows the government’s commitment towards the reform process and long-term vision for the telecom sector. We appreciate the consistent policy direction shown by this government and are confident that this reasonable tariff structure will help us keep the grey market in check and increase handset sales through the legal channel. The decision to remove mobile phones from the 1/6 criteria for filing income-tax returns and increasing the government’s contribution to the USO Fund are also welcome developments that will give a boost to both mobile phone adoptionand rural telephony. However, for this budget to have its desired impact, the government will have to ensure that its guidelines are duly executed and enforced.

Ravi Sharma, President, Alcatel South Asia
This is a very welcome budget which will help in making India a manufacturing destination for telecom equipment. This will surely make India a dominant player in the world for both telecom manufacturing and services.

Rangnath Salgame, President, India & SAARC Region, Cisco Systems
This is a progressive and balanced budget from the economic perspective. The announcement regarding implementation of VAT across all states from April 1, 2005 is a welcome step towards simplifying the tax regime in India. The decision to increase rural teledensity by 2007 will positively impact connectivity, helping rural Indians to be a part of the digital revolution. The revision in duties, particularly the exemption of customs duties on ITA-bound items, is likely to be welcomed by CIOs of enterprises, which are aggressively increasing their IT budgets this year to make them globally competitive. In addition, the measures aimed at augmenting growth in sectors such as SMBs, textiles and manufacturing will have a positive effect on the overall economic development of the nation.

D.P. Vaidya, Vice-President, Corporate, Hughes Escorts Communication Limited
Overall, it is a positive and progressive budget with a focus on infrastructure development that will help us achieve a 6.9 per cent growth rate. The reduction in customs duty from 20 per cent to 15 per cent and the reduction in corporate tax to 30 per cent is a positive step for the industry and will accelerate growth.

The measures to reduce the customs duty on telecom and IT goods will propel the growth and spread of telecom infrastructure, which will contribute to economic activity.

The finance minister could have provided a fillip to the spread of broadband internet in order to bridge the digital divide and to speed up the initiatives of “Bharat Nirman”.

We appreciate the many initiatives taken by the finance minister to empower the rural masses, which will help increase the GDP and supply chain productivity.