Budget 2011: Expectation of telecom sector

February 23, 2011

(The views expressed in the column are the author’s own and not those of Reuters)

With urban mobile penetration nearing 100 percent and rural mobile penetration around 25 percent, I think the government’s plans for enabling rural inclusion can give a big boost through telecom in disseminating banking, healthcare, education, specialised offerings for fishermen, artisans, etc. through e-connectivity. It needs focus, attention and support of government through various financial measures.

Also, isn’t this industry suffering from massive litigation on tax-related issues which is diverting business focus?

From direct tax perspective, I have mainly three budget expectations for telecom sector.

Firstly, with the ever growing need of building and improvising the telecommunication network and in order to provide  impetus and incentive to the telecom sector, the tax holiday for new rollouts under section 80IA should be restored.

Further with the ever increasing focus on consolidation in the overcrowded Indian telecom space, the tax holiday should be continued on M&A and demergers.

Secondly, in order to reduce uncertainty and litigation, clarification on whether the payments made for 3G/BWA spectrum should be allowable as revenue expenditure or whether they could be amortised as licence fees or whether the same would be treated as intangible assets, eligible for tax depreciation, would be welcome.

Thirdly, the gap between the normal tax rate and the MAT rate is narrowing year-on-year. The MAT rate needs to be reduced and rationalised in order to be in tune with the spirit of being an alternative tax on book profits.

Also, substantial litigation exists in respect of various withholding tax issues adversely affecting the industry at large e.g. withholding tax from payments like interconnectivity charges, roaming charges, bandwidth charges, commission to channel partners etc. Contradictory rulings of courts/tribunals increase the uncertainty over these issues. A legislative clarity is a need of the hour and would be welcome by the industry.

From indirect tax perspective, some of the main expectations from budget would be:
— Service tax exemption on IUC/ ICR for service providers to avoid cascading-costs
— As ARPUs are falling, service tax rates also be reduced to lower the tax-impact
— Cell sites/ tower locations to qualify as capital goods to allow CENVAT credit
— Double taxation of recharge coupons under VAT & service tax be avoided by granting complete exemption from service tax
— Services provided in Jammu and Kashmir be out of the purview of service tax
— Revival of benefits for service providers on foreign exchange earned by them under SFIS of the Foreign Trade Policy
— Exempt levy of SAD on import of telecom equipment and on trading of goods from SEZ to DTA to avoid dual levy of VAT/CST and SAD for such trading and
— Excise duty exemption be granted to telecom manufacturers for supply in rural areas.

Most importantly, funding from IIFCL should be equally extended to infrastructure-based public and private telecom projects.

This industry is a golden goose which is going to be 15 percent of GDP in a few years and such budget decisions could nurture the golden goose and help the government achieve its inclusive growth story.

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