The Indian telecom market has emerged as one of the fastest growing in the world. India's subscriber base has crossed 440 million and telecom operators are adding a whopping 8-10 million new subscribers each month.
Having said that, there is still substantial scope for further growth in this sector considering that teledensity is only 37% in India. The telecom industry is keenly awaiting the Union Budget, to be presented by Pranab Mukherjee, hoping that it would address some of the long standing issues adversely impacting this sector.
Discussed below are key pain points of the telecom industry from a tax perspective:
The telecom industry is subjected to a host of taxes/levies including service tax, license fees and spectrum charges and state levies such as octroi, VAT, stamp duty, entry tax, etc, apart from corporate income-tax. All of this aggregates to around 30% of their total revenues! The long-standing industry expectation is the rationalisation of the multiple levies into a unified levy, which would relieve the telecom companies of compliances under multiple regulations as also from the spate of litigation surrounding these levies.
Telecom operators were eligible for a tax holiday (u/s 80IA of the IT Act) on their telecom revenues for 10 years, for operations commencing prior to March 31, 2005. The tax holiday should be re-introduced to provide a level playing field to new players. Also, in 2007, the government enacted a provision denying tax holiday to undertakings, post transfer, in a merger. The denial of tax holiday should be done away with to enable tax efficient M&A activity in this space.
There is an on-going controversy on whether SIM cards sold by telecom companies through distributors and whether value-added services are exigible to service tax or VAT. A specific clarification is called for to settle this controversy.
Excise duty paid on equipment is allowable as a set-off against service tax liabilities only if the equipment is installed in the company's premises. Most of the telecom equipment (such as towers, routers, cables, modems, handsets, etc) would be located outside the company's premises, disentitling operators to the benefit of the set-off. The Budget should introduce specific provisions enabling such set-off.
Affordability with quality has been the hallmark of the Indian telecom success story. Prudent fiscal legislation and administration would definitely push the growth to greater heights in India.