For the fastest growing sector in the country, Budget 2007 has little to offer. Though Finance Minister P. Chidambaram acknowledged the performance of the telecom sector and somewhat addressed one of the long-standing demands for a unified tax structure for the industry, he did not attend to several other concerns hampering the growth of the sector.
What the industry wanted…
The wish list presented by the various industry associations before the budget included the following:
What it got…
Of these demands, a simplified tax structure was perhaps the most significant, say operators. Currently, telecom operators pay up to 30 per cent of their annual revenues in the form of various levies, including a 10 per cent licence fee, 12 per cent service tax, 4 per cent spectrum charges, and state-specific levies such as octroi and sales tax. Bringing these under a single tax slab could substantially lower the overall tariffs for telephone services.
While acknowledging the merit of the request, the finance minister passed on the assessment to DoT by asking it to set up a committee to study the present structure of levies and make suitable recommendations to the government. This is disappointing as studies already exist on the subject by telecom associations and the Telecom Regulatory Authority of India (TRAI).
Otherwise, there were a few small sops for the industry. For instance, the 2.4 million PCO booth owners of stateowned Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) would now be exempt from paying income tax on the commission they earn.
In line with the government’s thrust on improving rural telephony, the outlay for the Universal Service Obligation Fund has been increased from Rs 15 billion in 200607 to Rs 18 billion for 2007-08.
Telecom companies engaged in research and development have got a leg up ?? they can continue to deduct the equivalent of one and a half times their investments for another five years. This provision was scheduled to end on March 31, 2007.
The budget has also abolished the excise duty on the use of biofuels. Cellular operators are increasingly deploying biofuels to power their base stations, and the waiver will help reduce costs. Further, handset prices may see a marginal drop with the provision for no additional customs duty on parts, components and accessories of mobile handsets including cellphones, being extended up to June 30, 2009.
On the negative side, the move to bring content providers under the service tax net could make mobile value-added services such as ringtones, downloads and other entertainment-based applications dearer.
Also, the decision to bring renting of commercial property under the service tax net could make it expensive for telecom companies to deploy their switches and base stations. Besides, all companies will have to bear the burden of an additional 1 per cent cess to fund higher education.
To assess the implications of the budget for the sector, tele.net spoke to a crosssection of the industry, including service providers, analysts, industry associations and manufacturers. Here are their reactions to the budget…
Sunil Bharti Mittal, Chairman and Group Managing Director, Bharti Enterprises
Overall, it is a growth-oriented budget with a focus on agricultural and rural development. This should be seen by the industry as a positive step since the development of the rural sector will only benefit the industry in the long run in the form of increased demand and services.
More importantly, the budget sends a clear signal that corporate India, which has learned to stand on its feet, should not just look at the budget for growth. The focus on education, skill development and healthcare, and the continued thrust on infrastructure development are very welcome steps.
On the telecom front, we are glad that the finance minister has at least acknowledged, if not granted, a long-standing demand of the industry to replace multiple levies with a single levy.
Sanjeev Aga, Managing Director, Idea Cellular
We are encouraged to learn of the formation of a committee under the telecom ministry to work on the introduction of a single levy for telecom services. Presently, we have as many as eight or nine levies, which aggregate over a third of a customer’s bill. This high level of total taxation is retarding the expansion of services, chiefly to underserved areas. It is also a very inefficient method of taxation. We hope that the committee will execute its mandate at the earliest. This change will constitute a major reform for the Indian telecom sector.
We are also encouraged by the elimination of excise duty on biofuels. This will aid the expansion of telecom services into population centres where the supply of electricity is either erratic or absent.
On the negative side, we are dismayed to learn of the extension of service tax to areas like content provision, works contracts and commercial rents, and of the new cess on corporate tax. At a time when the country has seen buoyancy in corporate tax collections such fresh levies are disappointing.
S.C. Khanna, Secretary General, Association of Unified Service Providers of India
Currently, telecom service providers are rolling out their networks in rural areas and providing services at the most affordable prices. Despite this, the finance minister has failed to accept the telecom operators’ demand for a decrease in revenue share from 8 per cent to 6 per cent.
However, the minister has requested DoT to commission a study to create a unified tax structure for the sector, which is a good idea. But this will take some time to be implemented. The industry’s request for a decrease in revenue share to 6 per cent should be enacted immediately. For the national and international long distance segments, it is already 6 per cent.
Currently, service providers in India pay 26 to 28 per cent of their revenues as taxes. In neighbouring countries such as Sri Lanka, Pakistan and Bangladesh, the same is 2.5 per cent, 3.5 per cent and 3.5 per cent respectively.
The minister has also brought mobile content service providers under the service tax net. This is not such a big issue as the content segment is not significantly large.
All in all, in order to really impact the telecom sector favourably, the service tax and revenue share must be reduced.
Rajesh Chharia, President, Internet Service Providers Association of India
We were expecting that the government would liberalise the policy for internet services infrastructure or allow incentives to the industry in order to increase broadband penetration. But it has not turned out to be so. The government has been promoting 2007 as the year of broadband, with rural penetration as its main objective. So the industry should be given some benefit through other means as an incentive to enter the rural market.
It was required that the multiple taxes imposed on the sector should be rationalised under a single tax. The finance minister has avoided the issue by sending the case to DoT, which means that there is no decision for now and the case will be pending for at least one year.
There is also an increase in taxation on broadband equipment, PCs and PC-allied equipment. This will adversely affect broadband penetration.
From a social obligation point of view, for the agriculture, education and health sectors, it is a good budget. But this would be successful if there is transparency in spending the budgeted amount, in the right manner and area.
Romal Shetty, Director, Telecom, Risk Advisory Services, KPMG, India
Overall, Finance Minister P. Chidambaram’s budget is fairly neutral. There have not been too many changes. The finance minister has expanded the service tax net to include the development and supply of content for use in telecom and advertising. This is a good thing from the government’s point of view. The content development market is slated to grow from around Rs 17.1 billion to Rs 30 billion. In India, it constitutes 3 to 5 per cent of a service provider’s revenues while in countries like Japan and Korea, it is as high as 20 per cent, displaying the industry’s potential to grow in India.
Second, the minister has clarified what comes under the purview of service tax. There were previously some ambiguities. For instance, there was confusion over whether or not interconnect usage charges came under the ambit of service tax. This is because there have been numerous interpretations regarding whether service tax is only applicable on services provided to subscribers by telecom companies. It is now clear that any service exchanged between two telecom service providers also attracts tax.
The central sales tax has also been reduced from 4 per cent to 3 per cent. This will help the industry.
Sourabh Kaushal, Industry Manager, ICT Practice, Frost & Sullivan, India
The telecom sector currently pays one of the highest taxes including spectrum fees, licence fees and service tax. These constitute 25 to 26 per cent of a service provider’s revenue. We were expecting some decrease in these, which would ultimately percolate to the users and lead to higher levels of penetration. The finance minister has announced the formation of a committee to look into it. So we have to wait for its recommendations before we comment on anything.
Apart from that, the decision to bring in content providers under the service tax net could make value-added services somewhat costlier for the consumer. In order to achieve the target of 500 million subscribers by 2010, it would make sense for the government to bring down the various taxes and duties paid by the telecom sector.
All in all, it is not a very exciting budget.
Anand Agarwal, CEO and Director, Sterlite Optical Technologies
The finance minister’s recommendations for higher focus on e-governance is a significant milestone for the telecom equipment sector, as this would herald the next wave in demand for creation of high bandwidth communication infrastructures. Overall, we believe that this is a future-oriented budget, in line with India’s aspirations of becoming a significant global economy.
