Budget 2008: Telecom Industry Wish List

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The telecom sector has played a vital role in the momentous growth of the Indian economy. The rapid strides made by the India in harnessing the off shoring opportunity would not have been possible without a strong telecom infrastructure.

The telecom sector has been performing brilliantly with growth rates surpassing those in China, making India the fastest growing telecom market in the world. India is today adding over seven million subscribers every month with the current subscriber base of over 250 million expected to cross the half billion mark by 2010.

For a more inclusive economic growth, it is critical to take telecom services to the masses and more importantly to the rural areas. Reduction in network roll out costs and even lower tariff is therefore necessary for a faster roll out of these services in rural areas.

The sector, however, continues to be plagued by multifarious taxes, charges, fees and levies such as license fee, spectrum charges, service tax, entry tax, octroi, stamp duty besides the regular corporate income tax. This is stifling the growth and spread of telecom services. It is estimated that these taxes and levies account for more than 40 percent of telecom service revenues.

The sector therefore continues to be one of the highest taxed despite the fact that it offers the cheapest tariffs in the world. It is important that the present structure of multiple levies is rationalized to make the fiscal environment more conducive. The industry in therefore expecting rationalization /simplification of the tax provisions as they apply to telecom services.

To begin with, the industry expects the Government to lay down a road map for introduction of a specific tax regime for telecom services as proposed by the Finance Minister in his last budget. It is hoped that the replacement of multiple taxes and levies with a single levy would not only lower the incidence of taxation on telecom services but also simply tax compliance and reduce litigation plaguing this sector.

One of the key levies on telecom services is the revenue share based license fee. With buoyant growth in telecom service revenues, Government's collections on this account have increased many folds over the past few years. The Government should consider gradually reducing the license fee which should not result in any reduction in the collections since the rapid growth in telecom revenues would more than compensate the loss on account of reduction in license fee.

With the entry of new operators and expansion of operations by the operators into new circles, the Government could explore re-introducing the tax holiday under section 80IA of the Income tax Act for telecom operators, to provide a level playing field to the new telecom operators.

This would give the requisite financial support to the new operators/new entrants in circles and also enable faster roll out of networks and also further reduction in tariffs. Further, section 80IA earlier allowed continuity of tax holiday when an eligible undertaking providing telecom services is transferred under a scheme of amalgamation/ de-merger.

The Union Budget 2007, however, amended the provision to deny this benefit to the resulting company where it acquires an eligible undertaking in a scheme of amalgamation/de-merger after March 31, 2007. This amendment has acted as a deterrent for consolidation of telecom undertakings and genuine business reorganizations.

It is therefore recommended that the provisions of section 80IA be amended to ensure that tax holiday is not lost on transfer of telecom undertakings on amalgamations/demergers. Specific provisions could however be incorporated to prevent tax driven reorganizations.

Another area of concern relates to the CENVAT credit mechanism applicable to telecom operators. Under the present service tax regime, telecom operators (providing both taxable and non-taxable services, but not maintaining separate accounts, which is extremely cumbersome) can avail CENVAT credit for inputs only to the extent of 20% of service tax payable on taxable output service

However, with almost all services (barring a few exceptions) provided by telecom operators being subject to service tax, extension of a proportionate credit methodology (in the ratio of taxable turnover/total turnover as is available to the insurance industry) would be a more rationale and simpler way of claiming CENVAT credit on inputs by the telecom operators.

Further, in order to avail CENVAT credit, capital goods need to be installed within the premises of the company. The provision on CENVAT credit rules should be aligned to meet the telecom industry specific needs.

Restriction in current rules on 'inputs' or 'capital goods' such as removal, place of use, etc are impacting the credit admissibility on various goods (such as SIM cards, telephone sets, routers, modems and other CPEs). To address this, the credit rules may be amended to.

• Allow credit on all goods used in the telecom network irrespective of the nature of goods and place where these are put to use.

• The definition of premises for Telecom operators should be defined to cover the entire circle / service area where the service are provided.

Another area that needs to be addressed is whether value added services being offered by operators are liable to service tax or VAT. There have been instances where the states are trying to apply VAT on such services even though the Supreme Court has in the landmark BSNL case, has clarified that in a telecom service, all supplies take the character of a service with the possible exception of handsets.

Finally, the industry is not expecting any increase in duties and at least, no change in the service tax rate.

Unification/ reduction in some of the key levies would substantially aid in releasing funds required for enhanced investments in semi-urban and rural areas and making the services even more affordable to the masses.

The author is Tax Partner, Ernst & Young