Pre-Budget wish list of Telecom Sector by KPMG

The past year has seen remarkable developments in the Indian telecommunications industry; prominent being the target of 500 million subscribers achieved a year ahead of schedule. As the countdown to the budget begins, the industry is looking at the government to provide an additional impetus for continued growth of the sector.

With a slew of new operators entering the market and the raging tariff wars, consolidation in the sector seems imminent. The government needs to formulate an M&A policy which will help facilitate this consolidation before the industry becomes indefensible.

Another area deserving attention is that of m-Commerce. There is urgent need to have a supportive regulatory framework as well as buy-in from various stakeholders to propagate the use of mobile phones as banking hubs for the largely 'unbanked' population of the country. With this, customers, especially in rural areas and small towns, would be able to make cashless payments through their mobiles. This would allow banks to not only expand their customer reach but also leverage the mobile operators' strict subscriber verification norms, and experience of cash handling, customer protraction and redressal of customer grievances, to meet the KYC processes requirement.

The industry is also eagerly awaiting the final verdict on the 3G spectrum auction and the implementation of MNP. The reserve price for the 3G auctions was decided during the previous year keeping in mind the need to contain the fiscal deficit from the proceedings. However, the auctions are yet to be conducted because of the ambiguity over the availability of the spectrum.

A key demand of the industry is to rationalize the taxes being imposed at both the central and state levels into a unified tax rate. At present, operators pay as much as 30% of their revenues as taxes, making the sector one of the highest tax paying industries across the globe.

Today, with visible signals of economic revival coupled with continued pressure on tax collections, the issue regarding change in tax rate has assumed significance. The government may choose to adopt a middle approach by retaining the Excise duty at 8% and increasing the Service tax rate. The existing Excise duty rate is broadly aligned with the Central GST rate, which could be somewhere around 8%-9%. On the other hand, increasing the Service tax rate should not severely impact the service sector, which is currently better placed vis-à-vis manufacturing sector, in terms of recovery.

NCCD at 1% imposed on handsets in 2008-09 union budget has added to the tax burden on the industry. This goes against the key objective of the government to provide affordable connectivity in rural areas and should be discontinued. Non-availability of credit of ADC (4%) paid on Information Technology Agreement bound items like MSC, BTS and Routers adds to the infrastructure cost. Allowing credit of ADC would help to reduce the cascading effect and lower infrastructure costs.

Another important milestone for introduction of GST was abolishing CST in a phased manner, announcement for which was made in the Union Budget 2007. Accordingly, the CST rate has been reduced from 4% to 2%. In view of focused discussions on introduction of GST and concerted efforts of all stakeholders, CST rate should be reduced to 0-1%.

Current tax regime poses challenges to the industry due to various ambiguities such as availability of CENVAT credit on towers and shelters, and taxability of inbound roaming services. Providing clarification, maintaining consistency would go a long way to avoid perennial disputes.

The industry is also looking forward to extension of the tax holiday under section 80IA to all new operators and to those expanding their operations into new circles. Re-introducing the tax holiday would provide a level playing field to all telecom operators.

Continuity of section 80IA tax holiday on transfer of eligible telecom undertakings under a scheme of amalgamation/ de-merger is another key expectation of the industry. This benefit hitherto available to mergers /amalgamations effected till 31 March 2007 on extension would assist consolidation of telecom undertaking and genuine business re-organizations. Specific anti-abuse provisions may be incorporated to prevent tax driven reorganizations.

In view of the 3G/ BWA auctions expected in the current financial year, the industry would be paying significant upfront spectrum charges. Currently, section 35ABB allows an amortized deduction for any expenditure incurred for acquiring any right/license to operate telecom services. A specific clarification to include 3G upfront charges under the purview of aforesaid section would be a welcome step to ensure the deductibility of spectrum charges and avoid unnecessary litigation.

Recent judicial developments seem to suggest that in the absence of a tax withholding order from the Revenue authorities, the taxpayer is obligated to withhold taxes on any payment made to non-residents, even if such payments are not taxable in India. This trend would lead to significant administrative hassles for telecom companies which have significant overseas transactions with non-resident vendors for procurement of hardware, software, bandwidth, connectivity and so on.

In order to minimize administrative hassles and litigation, the industry is expecting clarification that categories of overseas transactions which are not taxable in India may be remitted without the requirement of a specific tax withholding order. The Indian payers could continue to obtain CA certificates in prescribed format to validate that the payment is not taxable in India.

While last year's budget was disappointing for the sector, industry stakeholders are hoping that their specific concerns would get addressed this year.

By Naveen Aggarwal, Executive Director, KPMG

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