Time for Action

The industry’s demands are vary basic, and need to be addressed urgently

Like every other year and every other sector, all eyes are glued to the unveiling of Union Budget 2012-13. The telecom industry too has a long wishlist from this budget. Associations are voicing their expectations on behalf of the industry and demanding concrete provisions this time from the budget.

Telecom services are recognized as prime support services for rapid growth and modernization of various sectors of the economy. Indian telecom sector has undergone a major transformation through significant policy reforms and has achieved a phenomenal growth.

The budget should spur the growth of the telecom industry, by nursing issues that have been neglected for years together. What is needed is a strong regulatory foothold on certain issues, which have been unattended or partially attended by the government for years together, due to which we are finding the industry in splits. VOICE&DATA has outlined certain key issues faced by the telecom sector and relevant recommendations that hopefully should find prominence in the Union Budget 2012.

Call for Infrastructure Status

Currently, ‘telecom’ does not fall within the purview of the definition of infrastruc-

ture projects. Over and above the concerns on high tax structure in the Indian telecom industry, telecom infrastructure companies are not able to get long-term benefits from associations like India Infrastructure Fund at the moment as they are not categorized as an infrastructure. By getting classified as an infrastructure, benefits pertaining to it can be availed. In that case, telecom infrastructure companies will be treated as utility companies and thus easily get finance. It’s also necessary, because infrastructure companies have a long break-even period by the way of sharing. So, there is an asset liability mismatch. To provide these facilities, infrastructure status is a must and thereby extending the benefit of Section 80-IA of income tax as also for the applicability of CENVAT for IP1 Infra Service Providers.

Infrastructure Development: Key to Economic Growth

Especially, Section 80-IA which is regarding providing incentives to the infrastructure companies as infrastructure projects involve large capital investments and have long gestation periods.

Umang Das, director general, TAIPA adds, “This status may also help to address ambiguities prevailing in the property tax terminologies for telecom towers: Sometimes they are taxed as an infrastructure property, sometimes as telecom towers, and in other cases as buildings.”

The Hon’ble President of India, in her address to the first session of both Houses of Parliament after the elections to the 15th Lok Sabha on June 4, 2009, had emphasized on the need to infuse massive resources into infrastructure development so as to enable economic growth. “Government should appropriately amend the definition of ‘infrastructure’ to cover ‘telecom’ also,” says RS Mathews, director general, COAI.

Re-modeling the Tax Structure

Taxes play a pivotal role in the growth of any sector. The telecom sector is paying multiple charges in the form of taxes and duties such as service tax, customs duty,

For further accelerating the growth of the telecom sector and to ensure an affordable tariff to consumers, there is a need to reexamine the multiple taxes and levies applicable on it

excise duty, Value Added Tax (VAT), Central Sales Tax (CST), entry tax, license fees, spectrum charges, etc. For further accelerating growth of this sector and to ensure an affordable tariff to consumers, there is a need to re-examine these multiple taxes and levies applicable on the telecom sector. Estimatedly, multiple taxes and levies account for as high as approximately 30% of telecom service revenues as compared to just 5% for other Asian economies.

Appropriate amendment in law is requested: To exempt from service tax the earnings of distributors from distribution of telecom services, as telecom operators are paying service tax on entire consideration; also to avoid litigation for distributors and consequential hardship.

“Lowering of levies can be a critical tool in the hands of policy makers to improve tele-density and expand service,” insists Mathews.

Ashok Aggarwal, director general, TEMA agrees and says, “Re-modeling of tax structure so as to dispense with the financial disadvantage is expected of the government on an urgent basis. There should be deferment of excise and VAT for a minimum period of 5 years for all Indian product companies and preferential market access should be mandated for the Indian products.”

Point of Taxation Rules, 2011 require payment of service tax on accrual basis:

Service tax is payable by the service provider on an issue of invoice, irrespective of the receipt of payment. Service recipient accordingly is now allowed to avail credit on a receipt of invoice regardless of payment thereof by amending CENVAT credit rules. Service recipient is obliged to reverse the credit availed, if the payment of corresponding invoice is not received within a period of 90 days. However no such facility is available to a service provider to adjust the service tax paid if payment of corresponding invoice is not received within 90 days. Effectively, even for bad debts, service providers end up paying service tax from their own pocket.

“Amending service tax rules to allow adjustment of service tax paid equivalent to the amount attributable to services against which payment remain unrealized (for a specific period of time say 90 days) should be immediately be done by the government. Such deduction should be allowed without any condition (eg, monitory limit, etc),” explains SC Khanna, secretary general, AUSPI.

CENVAT Credit: A Haunting Story

CENVAT credit related issues also haunt the industry in various aspects. CENVAT credit of central excise duty paid on towers and shelters and service tax paid on certain business related expenses (catering, mobile phones, rent-a-cab for network related requirement etc) are being denied. Also, CENVAT credit on capital goods/inputs located in J&K are used for providing taxable services in J&K and service tax is paid on telecommunication services provided to customers roaming in J&K.

As per Mathews, “A clarification or an appropriate amendment in law is requested from the government in the union budget to reduce unwarranted litigation, undue hardship, and cascading impact.” Associations are also voicing strongly for exemption of customs duty on Optical Fiber Cable (OFC). Goods mentioned in the Information Technology Agreement (ITA) are exempt from the payment of customs duty.

Telecom service providers are entitled to import several Ita-bound products required in providing telecom services without payment of customs duty. However no such exemption is available on import of Basic Customs Duty (OFC) of 10%—Tariff

heading 9001 10 00 of CTA), which are widely used by the telecom operators to provide telecom services. Applicability of customs duty on OFC increases the cost of services to end users.

Creating R&D Corpus

Year on year, the budget proposals have neglected the manufacturing sector with the result that the telecom manufacturing sector has virtually become non-exis- tent; and we are fully relying on import of equipment thereby creating a huge import bill which could well exceed the oil import bill in the coming future. This has also led to severe national security concerns, even if we leave aside the economic threat posed by such a lop-sided situation.

Putting in place an R&D corpus to support the R&D and IPR creation in the industry, will help incentivize the licensed service providers to meet the mandated target of purchase of domestic manufactured product. The R&D corpus could be created by levying a R&D cess of 5% on all licensed telecom service providers.

“The most important step the government can take to provide a conducive environment to the telecom manufacturing industry is by compensating for the fiscal disadvantage through remodeling of tax structure and establishment of a R&D corpus. This will give a required thrust to Indian product development and IPR creation,” insists Aggarwal.

The Indian domestic telecom manufacturing sector has a disadvantage factor of more than 22% vis-à-vis imports, this has also been highlighted by the Trai in its recommendation on Indian telecom manufacturing. We need to approach this issue in a right perspective, else this disadvantage factor will further result in predominant import of telecom equipment, leaving behind the domestic manufacturing. The draft NTP-2011 has envisaged the ambitious target of attaining 80% of total Indian telecom equipments demand to be met by Indian products by the end of this decade.

NK Goyal, president, CMAI insists, “With the announcement of National Manufacturing Policy, expected New Telecom Policy 2012, and ESDM policy, it is hoped that the budget will give some direction for implementation of policies for acceleration of investment in manufacturing. It is also expected that suitable measures would be announced for IPR creation in India. A big push for an innovation center for IPV6 will give boost for manufacturing within India.”

Accelerating the Growth of Broadband

We are quite aware of the fact that growth in broadband has direct impact on our country’s GDP. Ten percent increase in broadband penetration will result in 1.21.4% growth in GDP, making it vital for the real growth of our nation. It is time that we look at broadband as an essential infrastructure rather than just a service. Growth of broadband has not been the government’s priority in the last couple of

years. Moreover, no concrete steps have been taken by the government to provide any taxation relief to internet/broadband service providers. Rather this sector has been taxed heavily.

Rajesh Chharia, president, ISPAI explains, “Accelerating the growth of broadband across the country should be the top priority of the government.” Government should keep the above stated factors in mind while bringing uniformity in the licenses and/or license fee that ‘No Service Provider should be worse off’.

“Benefit under the Section 80-IA of the Income Tax exemption may suitably be extended to all licensed ISPS offering internet/broadband services, so that they can avail the 100% income tax exemption for the next 5 years and 30% deduction becomes available for another 5 years thereafter,” he says.

ISPS get resources such as leased lines, bandwidth, PRI, etc, from access service providers, who pay AGR to the government. Similar payments (ie, AGR) by ISPS is tantamount to double taxation. Accordingly set off should be available to ISPS as it is applicable in case of Service Tax. No new levies/taxes (License fee/agr, etc) should be imposed on broadband at least for the next 5 years.

“Abolition of Service Tax on internet/ broadband services would make such services affordable to masses, particularly in rural and remote areas. It would help to bring down the cost of such services to the end users (ultimate consumers). Such abolition would help the govern-

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ment to meet the target of internet/ broadband penetration across India.” reinforces Khanna.

Non-availability of Credit

Another concern for the telecom industry is negligible credit on input services by the government. Budget 2011-12 has excluded the aforesaid services from the ambit of input service, therefore, credit of such services is not available to the telecom service providers. As a consequence of non-availability of credit of such input services, the cost of telecom service has gone up. Issuing clarifications or amending the credit rules to provide the aforesaid services for the furtherance of business and commerce is the need of the hour.

The last budget has restricted credit of certain input services, including services required for construction of buildings, civil structures, etc, for most of the service providers, including telecom operators.

The above amendment has caused ambiguity regarding availment of credit on input services required by the telecom operator for erecting towers and other infrastructure at different sites. “A clarification should be inserted in the definition of ‘input services’ to provide that ‘civil structure’ does not include erection of tower and other infrastructure by the telecom service provider,” explains Khanna.

Will these See the Light of Day?

With such expectations voiced every year; there is a need to think over the gap between what is being expected and what is being done to the final commencement of this exercise. There is a strong roar from the industry that needs immediate hearing in the upcoming Union Budget 2012. Even though the government has taken some progressive steps by catering to such cries: Draft NTP, NMP, NFAP, etc, a lot more needs to be projected in the budget as well to alleviate these worries and concerns, which have been left unattended since years.

akankshas@cybermedia.co.in