The Union Budget 2016-17 has brought the telecom sector into the spotlight, given the government’s huge revenue expectations, particularly from spectrum sale during 2016-17.

In the budget, revenue from communication services has been pegged at Rs 1 trillion for 2016-17, a two-fold increase as compared to the revised estimates for 2015-16 (at Rs 560.34 billion). The majority of these earnings will come from the upcoming spectrum auction.

In spite of the fact that most operators are reeling from burgeoning debt, the government is viewing the telecom sector as a key contributor to the country’s non-tax revenue.

In order to achieve the government’s proposed revenue target, the upcoming auction would require greater and more aggressive participation from operators. This is a challenge given that the operators are already carrying a heavy debt of over Rs 2,000 billion on their books and are hard pressed to invest further in network expansion and upgradation. Moreover, most of these operators have annual installments that are due for the spectrum acquired during the previous auction.

Further, the budget proposes to declare the right to use of spectrum and its subsequent transfer as a service, which will be taxable. The proposal, if accepted, would further add to the financial burden of operators as they would be required to pay over Rs 770 billion as service tax during the upcoming spectrum auction.

In fact, proposed service tax levy could be one of the reasons for the termination of the spectrum trading deal between Videocon Telecom and Idea Cellular. The deal is reported to have attracted an additional service tax of about Rs 4.96 billion.

Given the industry’s dismal financial condition, coupled with the deteriorating operational performance in the face of growing competition, it is unclear whether the government will be able to realise its revenue targets. In addition, it remains to be seen what price the industry will have to pay for achieving these targets, both literally and metaphorically.