Budget: New Expectations

The telecom
sector in India has seen a revolution in the past decade and has been one of the
key drivers in India's progress. It has also immensely contributed in bridging
the rural-urban divide. The government's policy announcements on 3G and
broadband wireless access (BWA) licenses, focus on deployment of broadband and
implementation of mobile number portability (MNP) promise an exciting future for
the sector. The right support from the government will act as a catalyst for the
next phase of growth.

While the urban areas may be reaching 100%
teledensity, the focus now should be on rural India, where almost 70% of the
population resides. A rural penetration of just 15% implies significant growth
potential. With the new entrants in the sector and competition intensifying,
rural India is being seen as the future revenue source. However, requirements
for substantial spending on telecom infrastructure in order to achieve wider and
deeper coverage and at the same time ensuring services at low and affordable
costs would be a significant challenge. Fierce competition among existing and
new players has already triggered a tariff war and this is likely to adversely
hit the industry in the medium term. The new players would look for a level
playing field and rationalization of multifarious levies in order to sustain
themselves. Consolidation would also become the need of the hour and removal of
impediments would go a long way in ensuring the continuous growth of the sector.
In this backdrop, the industry's wish list from the Union Budget 2010 includes:

Reintroduction of tax holiday: With new services on
the anvil viz-à-viz 3G, WiMax, etc, along with the expansion of telecom network
to the rural sector, the telecom industry is driving for better platforms. Both
the existing telecom operators and new entrants are keen to make investments but
are reluctant due to long gestation periods. Given the long gestation periods,
an extension of tax holiday to 100% of profits of the undertaking for a period
of ten years out of a block of twenty would be a shot in the arm for the
industry. The benefit should not only be available to the existing telecom
operators, but to new entrants as well in order to give them a level playing
field. Tax holiday with particular reference to network rollouts in rural areas
would speed up the process significantly. Tax breaks to telecom infrastructure
service providers would also immensely help in cutting down costs, and thereby
would assist in reaching the rural subscriber faster.

Tax holiday be allowed to undertakings undergoing business
restructuring: With a rush of new entrants, there are fourteen to fifteen
small and big players in the Indian telecom sector, which is definitely not
sustainable in the long term. A consolidation phase would therefore be seen in
the near future, which would help the telecom companies to remain asset light,
enhance competitiveness, and unlock shareholder value. Denial of tax holiday to
all eligible undertakings undergoing bonafide restructuring is clearly harsh.
The restrictive provisions introduced in Section 80IA (12A) by the Finance Act,
2007 should thus be deleted so as to enable the much needed consolidations in
the telecom sector. Additionally, it should also be clarified that the Minimum
Alternate Tax (MAT) credit available under Section 115AA of the Act continues to
be available in case of merger/acquisition.

Clarification on deduction of tax on inter-company
payments made by telecom companies: The telecom sector involves a lot of
inter-service transactions between various operators viz-à-viz inter-connect
usage charges, use of passive infrastructure, network management services, etc.
Clarity on tax withholding obligations on such transactions would not only help
in reducing avoidable tax disputes, but would also increase operational
efficiency of the telecom service providers.

Restoration of exemption of 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: Being a highly capital intensive sector, the cost of rolling
out telecom services viz-à-viz 3G services, broadband services including
cellular services in the rural sector is significant. Therefore, in order to
provide an impetus to the sector, the exemption under section 10 (23G) of the
Act should be restored. Additionally, interest on loans from foreign sources
taken for the purpose of meeting capital expenditure including payment for 3G
spectrum/license should be exempted from tax under Section 10 (15) (iv) of the
Act.

Clarification on tax deductibility of lump sum spectrum
charge: No separate license is required by the existing operators for 3G
services. To avoid any dispute regarding tax deductibility of up-front spectrum
charge, it should be allowed to be amortized evenly over the license period
under Section 35ABB of the Act. Further, it should be clarified that license
fees levied as a function of revenues should be allowed as a deductible expense.

Availability of Cenvat Credit in case of business
transfer: In a case of sale of business, the long accepted position has been
that the Cenvat Credit, already claimed, is not required to be reversed, as long
as there is no physical removal of goods. However, recently 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 sale of a
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.

SAD refund: The network equipment imported into India
is generally liable to customs duty comprising of basic customs duty,
countervailing duty in lieu of excise which is creditable and special additional
duty (SAD) in lieu of value added tax (VAT), 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 help in faster rollout of telecom network especially in the
rural sector.

License fees and other levies: The Indian telecom
industry is subject to multiple levies/taxes which hamper deeper penetration at
affordable costs. A uniform single levy closer to the rates in developed
countries approximately 0.5-2% would also substantially boost telecom service
providers' capacity to expand their coverage and provide cheaper services across
the country.

It is sincerely hoped that the above
expectations would be favorably considered by the Finance Minister and this
would go a long way in satisfying the aspirations of the industry and continuing
the telecom growth story in India.

Vishal Malhotra

The author is tax partner, Ernst & Young India

vadmail@cybermedia.co.in