PRE BUDGET: Zero Duty Regime, Sir!

08 Feb 2005 09:54 IST

New Update

Budget 2004 was pronounced by many as a telecom budget due to the slew of
announcements made by finance minister P Chidambaram. He had specifically listed
telecommunication as a thrust area and outlined measures to boost domestic
manufacturing of telecom equipment.

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The industry has seen some announcements of mobile handset manufacturing in
India but beyond that there is little movement on the front. The glut in the
telecom-grade optical fiber and cables market failed to raise any enthusiasm.

And it would take more than Rs 508-crore bailout package for Indian Telephone
Industries (ITI) to compete with the likes of Bharti Teletech, and Ericsson.
Also, there has been no noise on the national manufacturing competitiveness
council and the investment commission.

FDI: A Bone of Contention

The biggest announcement in Budget 2004 was the hike in foreign direct
investment (FDI) in telecom sector from current 49 percent to 74 percent. But
the proposal got stuck in the political corridors of United Progressive
Alliance. Time and again Prime Minister Manmohan Singh and the finance minister
have reiterated their commitment to allow more foreign money to help the growth
of telecom infrastructure in the country. And the industry is expecting some
concrete steps in this direction in this budget.

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Interestingly,
the two big operators Reliance Infocomm and Bharti Tele-Ventures have raised
$300 million as syndicated loan and $354 million respectively.

On the other hand market is waiting for the Hutch IPO. These moves mean the
operators are not going to wait for the government to decide on FDI. They would
go ahead with their expansion plans with loans or take the equity market route.

Does this mean FDI does not have any relevance for telecom sector? It would
be wrong to assume so. More foreign operators would mean more competition and
better services at possibly lower tariffs.

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Also, not allowing a legal route often leads to complex financial structures-bypassing
the rulebooks.

Rationalize Tax Structure

Associations like TEMA, FICCI, CII, VSAT service providers association of
India (VSPAI), and Internet service providers association of India (ISPAI) have
asked for lowering of duties on equipment. The message being conveyed to the
finance minister is to take steps to boost competition and protect local telecom
manufacturers. NK Goyal, chairman, TEMA has said parity should be drawn between
equipment manufactured in India and that being imported. This would help in
promoting the domestic companies while also keeping the import channel open.

From 1 April 2005 the WTO regime comes into affect. Though there have been
some rumblings of the agreement being introduced in phased manner, it would mean
reduction of the customs duty to zero on many listed telecom equipment being
imported. This would make domestic purchases unviable as they attract almost 40
percent taxes compared with five percent on imports, which would also go from 1
April 2005.

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VAT is scheduled to be implemented by April this year. Industry is welcoming
this move, as it would avoid double taxation. They are also demanding VAT to be
applicable to imports. "There is lot of confusion on the VAT and WTO Even
the consultants are not very clear. Training and clarification beforehand would
help in better implementation of both," said Girish Madhavan, director
technical, Quadsel Systems. facturing category.

Industry wish list
Demand	Current Status
Steps to facilitate 74% FDI in telecom sector	Caught in political tangles, decision pending due to opposition by Left parties
Reduce service tax	10 percent service tax being passed on to the customers
Customs duty on mobile handsets (including FWT sets) should be removed	Mobile sets attract five percent and FWTs 15 percent customs duty, apart from a 16 percent excise duty
Education cess should be reviewed	2 percent education cess is charged over and above other taxes
Tax incentives for service providers servicing the rural areas	License fee is same and there is no tax break or holiday for service providers giving subsidized services in rural areas
Apply VAT to imported equipment	Currently VAT is proposed on locally manufactured equipment
Rationalize and reduce CVD (countervailing duty), import duty, and customs duty on capital equipment required to make mobile phones in India	Excise duty was made zero in the last budget but still other taxes form a major part of the total cost
Custom and excise duty should be reduced on switching and transmission apparatus	Switching and transmission apparatus attract 15 percent customs and 16 percent excise duty each
Period of rebate under Section 80 1A for the telecom operators should be extended to 20 years in place of existing 15 years.	A telecom operator is entitled to 100 percent exemption on taxable profits for 5 years and thereafter 30 percent exemption on profits of next five years during the initial 15 years from the date of commencement of commercial operation
Cellular services should be taken out of 1/6 scheme of income tax	If a person is a subscriber of a cellular telephone (except a wireless in local loop), he is required to furnish a return of income
Total duty on infrastructure equipment for service providers should be 0 percent (basic, CVD, and SAD)	Present total duty on infrastructure for telecom industry ranges between 28 to 34% (basic: 15 to 20%; CVD: 16%; SAD: 0%; education cess @ 2% on both basic and CVD)
All spares, expansion, and upgradation equipment should attract the same duty as that of the listed 29. Equipment and installation material, which presently attracts very high duty, should be included in list of 29	Presently most of the spares, expansion, and upgradation equipment for MSC, BSC, and BTS etc. attracts duty of 33.74% whereas all new equipment under the list of 29 attracts 16% duty
Definition of AGR should be based solely on service-related revenues and all non-service related revenue streams should be excluded	License fee and spectrum charges are payable on the basis of the AGR of operators

FICCI has also raised the demand for classifying setting up of cell towers as
a non-manufacturing job. Interestingly, some local bodies charge tax on these
towers by putting them in manufacturing category. They have also asked for a
review of the license fee for service providers willing to connect the rural
areas.

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There is also a demand to exclude mobiles from the 1 out of 6 category for
income tax purposes. "There needs to be a clarity on CDMA FWTs being
considered as basic service. This would mean, it should be taken out of the
category essential for tax returns," said Rajpal Singh, senior assistant
director, telecom affairs, FICCI.

Incentives for Broadband

The Broadband Policy 2004, which states the recommendations of TRAI on
fiscal issues to promote broadband in the country, has been referred to the
finance ministry. "The groundwork for these fiscal moves were made by DoT,
and the communications ministry has forwarded them to the finance ministry. It
is more of wait and watch on these rather than make fresh demands," said Wg
Cdr (retd.) BG Bhalla, secretary general, VSPAI.

As the government puts more thrust on broadbanding India, moves like further
reduction of duties on PCs and other equipment being used in this sector can be
expected in this budget. Moves like tax holiday for ISPs and equipment being
used would mean reduction in broadband tariffs and hence a higher penetration.

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Reduce Service Tax

In the last budget, service tax was raised from eight percent to 10 percent,
and an additional two percent education cess was also levied. This has been
directly passed on to the customers. There has been an increasing demand for
reduction in these duties.

This year there is no long list of demands from the communications sector.
Rationalization of duties is what is being watched for. "We are expecting a
zero duty budget. This would ensure lower tariffs, proliferation of
infrastructure, and create infrastructure in B and C category cities," said
V Murali, CEO, Precision Infomatic.

On the services side, issues related to telecom industry are more of
regulatory nature. In the last 12 months TRAI has been active in cutting down
access deficit charge (ADC), has monitored predatory pricing, and also pitched
in for lower license fees. However, more than the finance ministry, it is the
communications ministry that has to decide on issues like fees for spectrum and
universal service obligation (USO).

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"We have rightly invested in extending our information highway across
the country, it is now time to take positive steps for people to be able to
utilize this infrastructure for economic development," says Manoj Chugh
President - India & SAARC, EMC Corporation.

Apart from FDI, further cut in duty on mobile handsets (including the FWT
terminals), imported network equipments, and tax incentives to domestic telecom
equipment manufacturing companies-there is not a lot to expect from the finance
minister. If he takes a strong stand in favor of opening up FDI it would be a
dream come true, all other things would be a bonus to boost the industry
confidence.

Anurag Prasad