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Budget 2014: Customs duty could push up network costs, lead to data tariff hikes
July, 11th 2014

A 10% customs duty on specified telecom equipment imports envisaged under the Union Budget could raise the cost of setting up high-speed information highways by as much as $30 million annually, another trigger for telcos to raise data tariffs to offset a margin squeeze.

The budget proposals, presented by Finance Minister Arun Jaitely Thursday, sought to impose duty on certain specified telecom equipment, which according to experts, mostly falls in the category of 3G as well as the 4G equipment, including switches and broadband equipment.

These equipment will form the bulk of the telecom operators' expenses as most, including Bharti Airtel, shift their annual capex towards the next generation technology in place of what they refer to the 'legacy 2G' networks.

Cellular Operators Association of India (COAI), the GSM industry lobby body, said it was an expensive measure which could jack up network rollouts costs for an already debt-ridden industry.

"Cost of rolling out 3G and 4G networks could rise sharply in coming months if the duty on specified telecom gear is imposed, although we are still awaiting clarity from the government on the list of specified items," Rajan Mathews, director general of COAI, said.

Prashant Singhal of consultancy firm EY said that most of the equipment to attract the duty would fall in the purview of 3G and 4G which will "definitely raise the costs of setting up new networks," and the operators, in turn, could raise data rates to offset the effect.

Industry experts say that the industry is likely to spend anywhere between $2-3 billion in the next four years on networks which typically last a decade. "If you amortise the investment over 10 years, then it increases the annual cost by $ 20-30 million," Singhal explained.

While agreeing that network rollout costs of mobile operators could jump if the 10% import duty is slapped on specified telecom products, a senior executive of a leading European networks vendor estimated a far sharper cost damage to telcos that the $30 million estimated by some.

"We still await clarity on the telecom products that will attract 10% duty, but the stakes are big for global network vendors," he said.

COAI's Mathews was also disappointed over the budget proposal to bring mobile advertising under the service tax net. "It would push up mobile advertising costs and make it unpopular, which in turn, could impact advertising revenue for mobile operators".

He however was enthused by opportunities which could arise to telecom operators in the government's proposal for building smart cities. "The generous allocations to build smart cities, increase rural broadband penetration and encourage all government departments to go online would generate indirect benefits for the telecom industry".

"The Prime Minister has a vision of developing 'one hundred Smart Cities', as satellite towns of larger cities and by modernizing the existing mid-sized cities. To provide the necessary focus to this critical activity, I have provided a sum of Rs 7,060 crore in the current fiscal," Jaitley said in his budget proposals.

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