No Breather for Telecom

By: Vishal Malhotra. Tax Leader, Technology, Media & Entertainment and Telecommunications (TMT), EY India

The Budget 2018-19 has not paid any heed to the worries of the Indian telcos

The Economic Survey 2018, released a few days before the Budget announcement, stated that the telecom sector is going through a stress period with growing losses, debt pile, price war, reduced revenue and irrational spectrum costs. According to the Survey, the industry’s cumulative debt stands at a massive

INR 7.7 lakh crore.

The distraught telecom players have been keenly waiting for some income tax relief, relaxation in duties and clarity on various legal provisions to put an end to the never ending tax litigation for the burdened sector.

The Cellular Operators Association of India (COAI) was also advocating for a reduction in the GST rate from the current 18 percent to 12 percent in order to bring down the debt burden.

Populist Agenda, but What for Telecom?

However, much to everyone’s disappointment, there is nothing in the Budget fine-print to appease the already distressed industry. In line with the populist agenda, the Budget does acknowledge the importance of telecom sector for the economy and includes proposals to setup five lakh Wi-Fi hotspots which will provide broadband access to five crore rural citizens. Proposal of allocating INR 10,000 crore in 2018-19 for creation and augmentation of telecom infrastructure and establishment of an indigenous 5G Test Bed at IIT, Chennai, has also been made.

While the said policy measures re-affirm that telecom continues to be considered as a key contributor to infrastructure of the country, tax amendments do not provide any impetus to this sector and in fact fails to address some of the key tax concerns of the telecom players.

The telcos had expected amendments and clarifications on certain key direct tax issues including among others, exclusion of standard telecom services from the ambit of ‘royalties’, carry forward of losses and unabsorbed depreciation in case of amalgamation of telecom infrastructure companies, reduction in withholding tax rate on ‘commission’ payments to distributors of prepaid services, clarity on tax treatment of expenditure incurred towards ‘right to use spectrum’ acquired prior to April 1, 2016.

However, clearly the focus of the Budget does not seem to have taken away any of these worries of the Indian telcos.

One of the positives though for the telcos from an income tax perspective is alignment of the Income tax provisions with the Income Tax Disclosure Standard (ICDS) which enable telcos to take benefit of foreign exchange losses (other than on borrowing for import of assets) to be on revenue account. This shall help telcos in financing and refinancing purchase of spectrum as well as other domestic procurements from foreign currency loans.

Digitization and greater transparency continues to be the undertone of this Budget, with the finance minister introducing the new scheme for e-audits or faceless scrutiny assessment procedure across the country.

Telecom, mobile and electronics sector is undoubtedly a key thrust area to support the Prime Minister’s ‘Digital India’ and ‘Make in India’ initiative.

Budget 2018 has met the domestic industry’s demand of providing duty protection to support manufacturing operations by proposing to increase the rate of customs duty on mobile phones from 20% from the current 15%.

The rates of customs duty on various mobile parts like batteries, SIM Slot, screws, other mechanical items etc. are proposed to be increased to 15%, which should encourage manufacture of these products in India.

However, no duty rationalisation on telecom infrastructure products where the manufacturing ecosystem is not fully developed and imposition of ‘Social Welfare Surcharge’ on imported goods, means additional cost to the already stressed telcos.

The telecom players are largely disappointed with this Budget. There are no big bang announcements for this industry which has been eagerly awaiting for some breather given that the year 2017 witnessed drastic fall in profits, piling up of debt and near extinction of several mid-size telecom operators.

The sector players also expected other relief such as decrease in the spectrum and license fees which have not been considered in the budget. All in all, the Indian telecom sector, which otherwise is seen as a significant pillar for a growing economy, has been left to fight their own battle.