Union Budget 2014-15: Impact on Telecommunication Sector

R.Jayaprakash

While Chidambaram’s kitty had nothing specific for the telecom sector in 2013-14 budget, Arun Jaitely brought something for the sector in 2014-15. But what he brought could not make the sector happy because it was far short of the expectations. There were hopes that his brown briefcase carried something like, rationalization of taxes & levies, improved availability of airways through spectrum sharing and trading, reduction in spectrum charges, relaxed norms on M&A, rollback of the retrospective application of royalty definition, infrastructure status to telecom industry etc.

The telecom sector is burdened with intense competition, huge debts, falling revenue, spiraling roll-out costs, multiple duties and hefty penalties. The impasse on policy issues still continues despite the final verdict of Supreme Court on the issue of revenue share. Problem areas exist in spectrum usage, M&A and penalty regime. There are grey areas in license conditions and spectrum usage leading to varied interpretations on key issues among the licensor, the licensees, the regulator, the appellate authority,  the chief auditor and the courts of law. India ranks among the few countries where the obligatory contribution to USO fund as well as the penalties for violations of licence conditions are the highest. The additional payment of revenue share and spectrum usage charges to be made by the telecom operators on the non-telecom revenue for the past periods is yet to be assessed by DoT

The new Finance Minister has no remedies for all the above maladies, but there are some encouraging proposals which would narrow down the ‘digital divide’ and  encourage growth of telecom sector.

Revenue Projection

• The budget proposed to raise non-tax revenue of 454.71 billion rupees under the Major Head 1275-‘Other Communication Services’ during 2014-15, which is 11.32% higher than the revised figure of 408.47 billion rupees for the previous year.  The revenue comes from revenue share, Spectrum usage charges, proceeds from auctioning  of spectrum in 1800 MHz, 900 and 800 MHz bandwidth. 

The major budget proposals which impact on telecommunication sector are discussed below:

I. ‘Digital India’: Narrowing the ‘Digital Divide’

The National e-Governance Programme (NeGP) gets a new impetus with the allocation of `500 crore on the new initiative called ‘e-kraanti’ to build the infrastructure as per the National Rural Internet and Technology Mission. Another eGovernance initiative is the ‘Kisan TV’, a dedicated TV channel which would offer real-time information to farmers on new farming techniques, water conservation, organic farming etc. To achieve the target of reaching 250000 villages, the infrastructure in OFC, towers and other network elements are to be augmented.  Both ‘e-kraanti’ and ‘Kisan TV’ will open up new opportunities for telecom sector in infrastructure, connectivity and content segments. It may also need new Universal Service Obligation agreements with additional financial support to telecom operators. It will also accelerate the roll-out of ‘National Optic Fiber Network’ by Bharat Broadband Network Ltd (BBNL). 

II. Smart Cities and Smart Classrooms

Two smart proposals in the budget  are the setting up of 100 smart cities and online classrooms. The budget has earmarked `7060 Cr for the smart cities and `100 Cr for online classrooms. The telecom plays a vital role in both schemes with requirement of new connectivity and more online content. 

III. e-commerce

Government has given green signal to the manufacturers to sell its products through retail including e-commerce platforms by all domestic manufactures including those with 100% FDIs. Though it is aimed at encouraging sale of domestic products, it will  persuade more people to use internet benefiting the broadband service providers.  

IV. eBiz- one-stop clearance platform for investment proposals

The eBiz project is one of the integrated mission mode projects under the National e-Governance Plan (NeGP). The proposal aims to "create a business and investor-friendly ecosystem in India by making all business and investment related clearances and compliance on a 24X7 single portal, with an integrated payment gateway". 26 central and 24 state services are participants in the project which means integration of the portals of all participating departments and country-wide communication infrastructure by the year end.

V. Duties & Taxes

Telecom sector is subjected to multiple taxes and levies such as Excise/Customs Duty, Service Tax, revenue share including Universal Service Obligation levy, spectrum charges, TDS and other taxes at State levels. The operators and manufacturers in telecom sector continuously voice their grievances over the issue. Though major issues are not addressed, the new budget  has certain industry specific proposals on taxes and duties.

a.  Customs Duty on Imports

The budget has imposed a basic Customs Duty of 10% on imports of specified telecom products, not exempted under the ‘Information Technology Agreement’, which allows duty free import of products falling under eight categories covering telecom, computers and semiconductors like mobile phones and electronic chips. This would encourage domestic manufacturing sector, but since 80 to 90% of the sector requirement is met through imports, the hike in duty will increase the network cost of all telecom service providers, which may compel them to hike the tariff. The equipment required for roll-out of 3G and LTE (Long Term Evolution) services are imported ones and the cost burden on telcos from the new duty is estimated as between Rs 3000 to 6000 Cr annually. The Smartphone phones which are  imported will also cost more.

b. Educational Cess on Imports

All electronic goods imported to India now cost more by way of imposition of Education Cess of 3%. This has been imposed to bring in parity with domestic products. 

 c. ‘Nil’ duty on LED Panels

The basic custom duty on LED panels below 19-inch has been reduced to nil, which would reduce the cost of PCs/laptops using LED screen, and LED/LCD TVs. Besides there is a 4 percent exemption (Special Additional Duty) on smart card components. The PC penetration will speed up the broadband roll-out by telecom service providers.

d. No rollback of retrospective amendment

The budget offers no rollback of the retrospective amendment of IT Act 1961 through the Finance Act 2012. It means the litigation process in the case of Vodafone and Nokia will continue. Government had levied `7,990 Cr on Vodafone (now `20000 Cr including interest!) on acquisition of assets in India from Hong Kong based Hutchinson. When the Supreme Court ruled against the demand raised, the Government amended the IT Act with retrospective effect. Subsequently Vodafone issued an arbitration notice and the issue is before the arbitration under the Bilateral Investment Protection and Promotion Agreement between India and the Netherlands. Similarly Nokia was levied `13000 Cr towards tax on royalty payment made to it’s parent firm for ddownloading software used in the manufacture of mobile handsets at its Sriperumbudur factory in Tamil Nadu, which has been stayed by the High Court..

Though no rollback is made, Government has agreed that new cases would be referred to a high power committee.

e. Other changes in tax laws

§      Cenvat credit of inputs and input services to be taken within 6 month from date of invoice, bill, challan, etc

§      Increase in the rate of interest from 18% to 24%/ 30% on delay in payment of service tax beyond 6 months

§      faster resolution of tax disputes - Permissibility of resident taxpayers to approach the Authority for Advance Rulings ('AAR'), subject to fulfillment of certain conditions, and constitution of additional AAR benches.

§      Restriction of dis-allowances on account of non-deduction/ non-payment of TDS to 30% of the expenditure, to curtail the impact of double recovery of taxes on same payments;

§      Roll-back of Advance Pricing Arrangements ('APA') provisions for 4 previous years immediately preceding the first year covered under APA, to expedite speedy disposal of transfer pricing disputes.

VI. Revival of Telecom PSUs

The budget proposed fresh investment of `39,458 crore for the two loss making telecom PSUs-BSNL and  over the next five years. The two PSUs have total debt of `21208 cr as of June 2013 end (BSNL `6448 Cr, MTNL `14760 Cr). Both PSUs are confronted with problems such as shrinking customer base, falling revenue and spiraling operative expenses. BSNL suffered a loss of `7085 in 2013-14. Though MTNL reported a profit of `7825 Cr in 2013-14, it is mainly due to write back of provision for pension liabilities and spectrum amortization expense. The proposed financial assistance of `39,458 Cr is in addition to the waiver of `1141 cr Government loan to BSNL and agreed return of `6725.51 Cr and `4533.97 Cr to BSNL and MTNL respectively for surrender of BWA spectrum. 

Conclusion

Major demands of telecom sector remain unfulfilled, but Government has revealed its intention to go ahead with NeGP and bridging the ‘digital divide’ which would open up new opportunities for the telecom sector. The levy of 10% duty on telecom products may be a boon for domestic manufacturers but a bane for service providers who meet 80-90% of their demand through imports. The telecom PSUs, BSNL & MTNL, both reeling under severe resource crunch get some relief from the proposed Government support.