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The telecom industry seems to be undone by a budget that met no expectations, and the industry was left longing for much more
For an economy reeling under inflationary pressures and a rising fiscal deficit, the Union Budget 2012- 13— Pranab Mukherjee’s 7th budget—was keenly awaited by the Indian business and foreign investors alike, largely to see whether the finance minister chalks out a credible path for reforms process, thereby escalating growth and investor confidence. Amidst the expectations of multiple sectors of the industry, the budget was expected to provide impetus to the telecommunication sector, being the prime driver for the economical growth of the country.
However when Mukherjee quoted Hamlet in saying that he needed to be cruel only to be kind, it seemed to be true for the telecom sector as no signifi- cant policy announcements were made for this sector, except inclusion of fixed telecom network and telecom tower infrastructure for viability gap funding. This left the industry with a set of unfulfilled expectations.
The Debate
On the direct tax front, while the telecom players were expecting some incentive in terms of extension of tax holiday benefits to 3G and broadband internet sector and rationalization of certain tax withholding provisions, which have significantly plagued the telecom players in India, the proposals outlined by Mukherjee have been a significant let down and have in fact surprised the industry.
One of the biggest surprises has been the retrospective amendment attempt- ing to tax indirect transfer of shares by way of retrospective insertion with effect from April 1, 1962, of deeming fiction that share or interest in a company or entity registered or incorporated outside India shall be situated in India, if the share or interest directly or indirectly derives its value substantially from the assets located in India.
The proposal to tax indirect transfers unsettles the positions settled by the Apex Court recently in the landmark case of Vodafone and the debate will again knock the doors of the court. The proposal makes the relief granted by the Apex Court to be very short lived, with taxability of various similar transactions expected to come in limelight once again which was presumably settled by the principles laid down in the case of Vodafone.