The countrys telecommunication sector is undergoing a phase of rapid consolidation, expansion and modernisation, evidenced by both subscriber and service growth. The growth witnessed by the industry has been phenomenal and is expected to demonstrate similar trends given the continuous technological innovations.
Telecom modernisation requires a massive expansion of infrastructure as also significant qualitative improvement. Huge capital investment, high revenue sharing license fee and a long gestation period along with the rapidly reducing tariffs have put tremendous pressure on the profitability of the telecom companies. In order to promote the growth of the telecom sector and to encourage the flow of investment in the sector, the existing tax benefits should also be extended to new players and to certain other segments, which are basic to the provision of telecom services.
Next few months promises introduction of 3G, WIMAX, and VoIP networks. The 3G technology is a catalyst to the development of the Indian telecom sector and is going to come in two different flavors. Firstly, existing operators with 2G or 2.5G technology would be upgrading to 3G and secondly, many new operators and some foreign players would be entering the market with 3G. The economics for the telecom operators (existing or new) for rolling out of these new services would be attractive if they are able to achieve a minimum scale coupled with the tax benefits for initial years. Therefore, in order to support the growth and boost the sector, the government should extend the cut off date for tax holiday available under section 80IA of the Income-tax Act, 1961 to the new undertakings introducing telecom services as well as the existing undertakings going for massive expansion and upgradation of their existing infrastructure.
Though the average revenue per user (ARPU) is flattening or going down, telecom companies are pioneering about being efficient. As a step, Indian telecom operators are shedding their infrastructure baggage and moving over to attend more pressing requirements, like increasing subscriber base and improved customer focus. Consolidation would help the telecom companies to remain asset-light and enhance competitiveness and unlock shareholder value. It is thus expected from the government in the Budget that section 80IA tax holiday would continue in the event of transfer of eligible undertaking providing telecom services/network/infrastructure under a scheme of amalgamation/de-merger. Specific provisions could however be incorporated to prevent tax driven reorganisations. In essence, the restrictive provisions introduced in section 80IA (12A) by the Finance Act, 2007 be deleted. Similar restrictive provisions are not there for other sectors.
Further, keeping in mind that the ministry has allowed sharing of infrastructure between various operators, the independent tower companies are making huge investment to develop telecom network in various geographies. This is also crucial as the next phase of mobile growth is being seen in rural and sparsely populated areas where installing individual towers (60-65 per cent of network expenditure) increases both capex and opex costs for network service providers. Common/sharing infrastructure would also entail faster penetration of multiple telecom service providers and at lower costs. Better utilisation of scarce natural resources such as land, fuel, electricity etc would be in the public interest than to have multiple sets of poles or towers on streets for each operator. Infrastructure companies serve as a backbone to the telecom sector and helps in efficient t functioning of the entire eco system.
Therefore, as a further step to achieve the objective of infrastructure development, the government should extend the tax benefits under section 80IA to companies providing infrastructure facility to telecom service providers. Similar benefits are available to the power sector under section 80IA when the enterprise undertakes modernisation or renovation of distribution and transmission lines for supporting the power generation and distribution activities.
Further, the statistics reveals that the growing telecom services are very important and have a direct bearing on Indias GDP. With new technologies and policies being introduced and investment liberalisation, the telecom industry is driving to converge solutions via mobile internet services over better platforms. A combination of technologies with VOIP, WiMax, GSM, CDMA and local networks will also increase the value of each of the investment already made. There is no need to discriminate the new licensees geared to provide qualitative and effective services. Therefore, the cut-off date of 31 March 2005 should be extended for all telecom operators who have been issued licence by the Government at different times and the extension of the tax holiday to all those expanding their operations into new circles.
As the telecom sector has been growing at a much faster pace and has significantly contributed to economic growth and development, it should be given equal importance and should be treated at par with other infrastructure sector which enjoys 100 per cent exemption of the taxable profits for the full term of 10 years in succession under section 80IA. Therefore, limitation imposed on the telecom service providers by introduction of sub-section (2A) to section 80IA, which provides 100 per cent exemption of taxable profits for the first five years and thereafter 30 per cent exemption of profits of next five years should be deleted and the exemption provisions be aligned.
Another significant step expected in the Budget is reintroduction of the tax incentives hitherto available under section 10(23G) of the Act to infrastructure capital funds or infrastructure capital companies or banks in respect of interest and long term capital gains (other than exempted long term capital gains) in relation to their investment in enterprise engaged in infrastructure sector and more particularly providing telecommunication services and infrastructure facilities/services.
The tax incentive to the undertakings would encourage better infrastructure and technologies for faster roll-out of new and improved telecom services by experienced and foreign players, and would enhance viability of the telecom projects.
Given that the telecom sector consists of lot of inter-service transactions between various players like inter-connect charges, use of passive infrastructure, network management services etc., clarity on tax withholding obligations on such transactions is also expected, which would help in reducing avoidable disputes and increase operational efficiency. Further, clarification is also expected from the government that telecommunication services include VAS services in the line of definition of telecommunication services under the TRAI regulations.
Indian telecommunication sector is a very competitive and fast growing sector in the world. The telecom trends in India shows a great impact on everything from PC, internet, broadband, cable handset features, talking SMS, IPTV, and managed services to the local manufacturing and supply chain. However, due to huge initial fixed cost and lack of infrastructure, achieving break-even seems to be difficult for telecom operators and service providers. The timely introduction of some of the incentives stated above would provide much needed boost to sector and helps the players in providing greater communication standards and making the Indian network progressive.