India?s booming telecom sector, which has been battling a series of unpleasant controversies for the past few months had expected significant tax reforms from the government in the budget 2011 to support the massive telecom investments undertaken in 2010. However, with the finance minister Pranab Mukherji?s attention mostly on maintaining the overall growth momentum of the economy given the current inflationary pressures, the budget presentation 2011, didn?t have much to offer to the telecom sector.
Naturally, the telecom industry denizens have been disappointed. Operators, vendors and industry associations had submitted long pre budget wish lists to the minister, which according to them was largely ignored. Concessions in some categories have been given, but relief attempts have been mostly piecemeal and cursory, say industry analysts.
?The Budget 2011 covered very little on telecom, which is one of the fastest-growing sectors. There were no significant steps on spectrum-related issues. Neither was there any announcement regarding the renewal of 2G spectrum. Further, there are no service tax exemptions on broadband, which could have increased the penetration of broadband. The overall Budget impact may be positive, but no tax incentive to the telecom industry remains an area of concern,? noted Parminder Kaur Saini, Frost & Sullivan?s program manager, ICT practice, South Asia & Middle East.
What the industry wanted was: rationalisation of the multiple taxes and levies that exists in the industry; a uniform license fee of one per cent of the AGR. Besides, the re-introduction of tax exemptions for network rollout in rural areas and for telecom infrastructure service providers. The industry also wanted the inclusion of tower companies into section 80 IA, to help improve profitability and the removal of bank guarantees for telecom.
The budget 2011 instead has provided for a drop in the surcharge on corporate tax from 7.5 per cent to 5 per cent. This is welcome. It is a step towards transitioning to new Direct Taxes Code which will become effective from April 1, 2012.
The biggest gainer from the 2011 budget has been the handset makers. Concessions on parts, components and accessories for the manufacture of mobile handsets are to continue for another year, till March 31, 2012. Also a few more items have also been included in the ambit of concessions. These include: parts or components for the manufacture of battery chargers, PC connectivity cables and hands-free headphones of such mobile handsets and sub-parts for the manufacture of such parts and components.
?For players like us who have a growing market in tier-II and tier-III cities, the extension of concession applicable to parts, components and accessories will definitely result in lowering the prices of devices, however the overall impact will not be more than two per cent of the MRP,? says S N Rai, co-founder and director, Lava.
In order to give a fillip to the manufacturing space, the budget announced the government?s intention of increasing the manufacturing sector?s contribution to the GDP from about 16 per cent to 25 per cent over a period of ten years. The government is also planning to frame a manufacturing policy, which will bring down the compliance burden on the industry through self-regulation and help make the Indian industry globally competitive.
Meanwhile, for the rural sector, the government plans to provide rural broadband connectivity to all 2,00,000 panchayats in three years. The budget has also announced that rural telecom and rural broadband will be included in the overall allocation of Rs 580 billion (which includes other rural initiatives as well).
These are all seen as positives by the industry. Additionally, while no sops were given to the R&D segment, the government is considering setting up a National Innovation Council under the leadership of Sam Pitroda, which will prepare the roadmap for innovations in India. The budget has also proposed setting up of State Innovation Councils in each state and these shall be aligned to central ministries as well.
The negative as seen by the telecom industry is the increase in the Minimum Alternate Tax (MAT) from 18 per cent last fiscal to 18.5 per cent. This will increase the tax burden on most telecom companies. Further MAT will also be applicable on developers (builders) of Special Economic Zones and units operating in SEZs as well.
Additionally, though the industry had hoped for an exemption of service tax on broadband to boost the segment. Instead, the finance minister has added more services to the tax net in a bid to ensure a smooth transition toward Goods and Service Tax (GST). Thankfully the government’s commitment to reduce the digital divide, by ensuring rural broadband connectivity and increase the penetration of household broadband in 3 years has soothed the industry somewhat. As S.C. Khanna, general secretary, Association of Unified Telecom Service Providers of India puts it, ?no tax benefit for the sector has been announced though village broadband has been taken into consideration?.
Apart from the above announcements there is little for the telecom sector. ?The Budget 2011 covered too little on telecom, which is one of the fastest-growing sectors. There were no significant steps on spectrum-related issues. Neither was there any announcement regarding the renewal of 2G spectrum. Further, there are no service tax exemptions on broadband, which could have increased the penetration of broadband. The overall Budget impact may be positive, but no tax incentive to the telecom industry remains an area of concern,? said Parminder Kaur Saini, program manager, ICT practice, South Asia & Middle East, Frost & Sullivan.
?The reduction in the surcharge on corporate tax will hardly be carrot to an industry which was looking forward to a more broad based change. More particularly, the industry was expecting clarity on corporate tax treatment of spectrum charges and the associated borrowing cost along with tax holiday benefits on consolidation to create a more level playing field,?
“We in the cellular industry are deeply disappointed that the industry that has provided so much to national development and has made India the second largest and fastest growing telecom market in the world, has not received the encouragement and nurture befitting such an important engine of economic development and nation building,” said Rajan Mathews, director general, Cellular Operators Association of India.
Despite the disappointment, the industry leaders have overall welcomed the Union Budget proposals 2011 claiming that though the telecom industry?s demands have been overlooked, the budget does provide the right thrust on social development. As Sunil Bharti Mittal, Chairman and Group CEO, Bharti Enterprises says, ?The finance minister has made an honest effort to reconcile two seemingly conflicting objectives of maintaining growth momentum and containing the inflationary pressure in the economy. As expected, no big-bang reform measures have been announced but the future rollout schedule of key initiatives has been delineated. The finance minister has announced a road map for the implementation of GST; one hopes the much-needed constitutional amendment goes through smoothly. The fact that the Direct Taxes Code (DTC) will finally be coming into force from April 2012 is welcome,?
