India’s fast growing telecom industry probably lobbied as hard as any other sector in the run-up to the union budget for 2009-10, which was presented in July. The telecom wish-list comprised relief from multiple taxes, major reforms in special economic zone schemes, abolition of fringe benefit tax (FBT) and budgetary thrust on e-governance and e-education.
The finance minister, Pranab Mukherjee, while acknowledging the contribution of the telecom sector in the country’s development and GDP growth in his budget speech, passed up on some of the key issues in the industry, feel telecom experts. For example, according to D. Shivakumar, vicepresident and managing director, Nokia India, “The budget has overlooked the industry’s demand to rationalise the multiple taxes currently being imposed on it at both the union and state levels.”
Key provisions
The abolition of FBT is one of the major positives for the telecom industry. Says Prashant Singhal, partner and telecom industry leader, Ernst & Young: “This is a big positive for the industry. At one stroke, it has removed a compliance burden on companies.”
However, according to some analysts, the increase in minimum alternate tax to 15 per cent of book profits from the earlier 10 per cent will more than offset the reduction in FBT. As a result, it could affect the cash flow of telecom companies.
The government has extended the 4 per cent countervailing duty (CVD) exemption on imported mobile accessories and components by a year. This move is expected to encourage the manufacture of handsets in India. “Full exemption from 4 per cent CVD was available on accessories, parts and components imported for manufacturing mobile phones till June 30, 2009. I propose to reintroduce this exemption for another year,” said the finance minister.
This move, however, will not impact the existing prices of mobile phones. According to Pankaj Mahindroo, president, Indian Cellular Association, “The one-year extension of exemption will not have any impact on the existing prices of handsets, but it will certainly boost manufacturing in India by global handset makers. It will also help Indian companies to manufacture devices domestically instead of importing phones.”
Nokia, the world’s largest handset maker, has stated that the CVD exemption will ensure affordable access to mobile phones for consumers, which, in turn, will drive telecom growth.
The budget has provided a breather to the ailing government-owned telecom equipment manufacturer, Indian Telephone Industries (ITI). The company, with cumulative losses of Rs 28 billion, has been allocated Rs 28.2 billion for a clean-up effort. According to analysts, the grant, if used effectively and with accountability, should prove useful for the company.
Earlier, the government had announced that it would bail out ITI. It has invited expressions of interest for sale or formation of joint ventures to run three of a total of six manufacturing units of ITI. The public sector unit, which has 12,000 employees, manufactures equipment for landline and mobile networks. Though ITI has been receiving grants from the government, it has not been able to tackle the increasing competition in the telecom equipment manufacturing segment.
With a strong focus on social welfare including infrastructure, job creation and education, the budget has allocated Rs 24 billion from the Universal Service Obligation (USO) Fund to subsidise unviable mobile, internet and landline operations in rural India.
Telecom companies are mandated to contribute 5 per cent of their annual revenue to the USO Fund. The unutilised amount currently lying with the fund is estimated to be over Rs 200 billion. According to officials from the Department of Telecommunications, the bulk of this amount will be used for the second phase of the rural mobile project. Under this scheme, the government will subsidise construction of 11,000 telecom towers across 240,000 villages.
Spectrum pricing
According to the budget paper, the government expects to raise nearly Rs 350 billion from the sale of 3G spectrum. This is likely to account for about 75 per cent of the total collection of Rs 483.35 billion from the telecom sector in 2009-10. In 2008-09, the government’s receipts from the sector stood at Rs 131.74 billion.
The 3G spectrum auction is expected to be held in December. The government has already indicated its intent of doubling the base price for pan-Indian 3G spectrum to Rs 40.4 billion from the current Rs 20 billion.
Overall, analysts feel that the union budget for 2009-10 does not have much for the telecom sector. As Singhal puts it: “The budget has focused heavily on social issues. However, there are no specific recommendations for the telecom sector.”
