The fast track growth of the Indian telecom industry has made it a key contributor to India's progress. India is making a big mark as a growing economic power and has at present, one of the fastest growing teledensity in the world. The dynamism of the sector though, is far from over.
The Government's policy announcements for 3G and Broadband Wireless Access (BWA) licenses focus on deployment of broadband, phased implementation of Mobile Number Portability (MNP) and the likely introduction of Mobile Virtual Network Operators (MVNO) promise to further stir things up.
However, with low ARPU (Average Revenue Per User) and tariffs, reduction in levies is required to sustain this growth. The telecom sector is plagued by multifarious taxes and levies like license fee, spectrum charges, service tax, entry tax, octroi, stamp duty, apart from corporate income tax, and rationalizing them has become essential in order to give impetus to the expansion of the telecommunication network in the country.
The industry expectations from this budget include:
Extension of tax holiday under section 80IA of the Income tax Act, 1961 (Act) - Given the long gestation period and huge capital costs (including upfront spectrum fee) involved in establishing 3G and broadband networks, for effective roll out of tax holiday under section 80 IA should be extended to provision of 3G and broadband services considering them to be separate and distinct undertakings. Similarly, tax holiday should also be extended to tower companies to facilitate a faster roll out of passive infrastructure which is critical for network expansion by the telecom operators.
Retention of tax holiday by telecom undertaking that are transferred by amalgamations and de-mergers - The Finance Act 2007 brought in an amendment in Section 80IA of the Act by withdrawing tax holiday for undertakings that are transferred under a scheme of amalgamation/ de-merger. This has significantly affected genuine re-organization of telecom operations of the telecom operators and is also impacting consolidation in telecom sector. It is suggested that suitable provisions may be brought in to plug any perceived 'anti abuse' as against complete denial of benefit to an undertaking, which is transferred under a business reorganization.
Exemption on dividend income/interest/capital gain - Restoration of exemption of dividend income, interest on long term finance and long term capital gains arising to the investing companies/infrastructure capital funds for the investments in telecom service companies under section 10(23G) of the Act. This would enable telecom undertaking to raise long term funds at a more reasonable cost in the present high interest rate regime.
Clarification on tax deductibility of lump sum spectrum charge - No separate license is required by the existing operators for 3G services. To avoid any disputes as regards tax deductibility of this charge, it should be explicitly allowed to be amortized evenly over the license period under section 35ABB of the Act.
SAD should either be exempted or made creditable - The network equipment imported into India is generally liable to customs duty comprising in addition to Basic Customs Duty, Countervailing Duty in lieu of Excise, which is creditable and Special Additional Duty ('SAD'), which is a non-creditable duty for the telecom service provider. SAD should either be exempted or made creditable (against output service tax) for telecom service providers, as this will reduce the capital cost and would help in faster roll out of telecom network.
GST Implementation - The tax authorities (both VAT and service tax) in multiple instances have sought to recover both VAT and Service Tax on a single transaction. A unified tax i.e. GST should be implemented at the earliest to relieve the industry from the present tax complexity.
Availability of Cenvat Credit in case of business transfer - In a case of transfer of business, the long accepted position has been that the Cenvat credit already claimed is not required to be reversed, so long as there is no physical removal of goods. However, recently some courts have taken a position contrary to this settled legal position. A suitable amendment should be brought in the Cenvat Credit Rules stating clearly that in a case of transfer of business not involving removal of goods from the premises, there should not be any reversal of Cenvat credit.
Cenvat credit on telecom towers, shelters and other goods at tower /cell sites - The authorities have been disputing Cenvat Credit on telecom towers, pre-fabricated shelters and other goods which are installed at a tower/cell site. These goods are indisputably essential for providing telecom services and constitute a major portion of the total investment made by a telecom service provider.
Further, though these goods are capital in nature for the purpose of accounting, there are issues regarding classification as 'capital goods' or as 'inputs' for the purpose of Cenvat Credit. Denial of Credit on cell sites/telecom towers is devoid of the basic principles of Cenvat. The disputes being raised by the authorities are leading to protracted litigation and blockage of funds. Accordingly, necessary clarification should be issued to allow credit of such goods as 'capital goods' in line with the basic principle of credit.