Union Budget 2015-16: Impacts on Telcom Sector

R.Jayaprakash

The Union Budget 2015-16 evoked mixed responses from the telecommunication sector. The sector expectations were many- extended loan benefits,  tax rationalization, tax rebates,  spectrum availability  through sharing and trading, full infrastructure status etc. There are no specific announcement on the above issues. In June 2013, RBI notified  Telecommunications and telecom services as an infrastructure sub-sector, thus making it eligible for easy bank financing in addition to overseas fund raising. The additional outlay of Rs 70000 cr in infrastructure proposed in the Finance Bill 2015, doesn’t include telecom, but under ‘Digital India’ there are new initiatives.

The government expects revenue of 428.66 billion rupees ($6.95 billion) from the telecoms sector towards revenue share and auctions of airwaves during the fiscal year 2015-16.

Digital India

Digital India is a Rs 1.13 lakh crore programme to transform India into a digitally empowered society and knowledge economy. The ongoing schemes like National e-Governance Plan (NeGP), National Optical Fibre Network (NOGN), National Mission of Education through ICT (NMEICT) are certain initiatives by the Government to achieve this goal. The Budget 2015 has set aside Rs 2,510 crore under the head “Digital India Programme and Telecommunications and Electronic Industries”.

The National Optical Fibre Network Programme (NOFNP) of 7.5 lakh kms, networking 2.5 lakh villages is being further speeded up by allowing willing states to undertake its execution, on reimbursement of cost as determined by DoT."

Read more at: http://www.moneycontrol.com/news/economy/union-budget-2015-fm-stressesdigital-india-no-major-reformstelecom_1315714.html?utm_source=ref_article

The National Optical Fibre Network Programme (NOFNP) of 7.5 lakh kms, networking 2.5 lakh villages is being further speeded up by allowing willing states to undertake its execution, on reimbursement of cost as determined by DoT."

Read more at: http://www.moneycontrol.com/news/economy/union-budget-2015-fm-stressesdigital-india-no-major-reformstelecom_1315714.html?utm_source=ref_article

The National Optical Fibre Network Programme (NOFNP) of 7.5 lakh kms, networking 2.5 lakh villages is being further speeded up by allowing willing states to undertake its execution, on reimbursement of cost as determined by DoT."

Read more at: http://www.moneycontrol.com/news/economy/union-budget-2015-fm-stressesdigital-india-no-major-reformstelecom_1315714.html?utm_source=ref_article

The roll out NoFN being implemented by BSNL and Railtel is already delayed for more than one year. The budget announced participation by willing States in its implementation on reimbursement of cost as determined by Department of Telecommunications. Andhra Pradesh is the first State to come forward for execution of NoFN. The State has proposed to provide broadband connection with 10-15 mbps download speed to each 12 million households for Rs 150/month, at an estimated project at a cost of Rs 4,913 crore in five years. The state will create a 100% state owned corporation named Andhra Pradesh Fibre Corporation and 'Digital Andhra Corporation' under Public-Private-Partnership. This will encourage other States also to participate in NoFN and help in bridging th ‘Digital Divide’ in the country.

JAM

The announcement of JAM (Jan  Dhan programme, Aadhaar and Mobile) aimed at financial inclusion of all people has an important role for telecom sector, since the cashless transfers are delivered through mobile phones. This will require increase in mobile phone penetration in the country.

TAXATION

Rationalization of taxes has been a long standing demand by the telecom sector, but there are no changes which offer any major reliefs to the sector.

Service Tax

Service Tax is a major source of revenue for the Government and  there has been phenomenal increase in the  revenue through upward revision in tax rate, expansion of the tax net and other changes in the Rules. The new changes in ST have been published by Department of Revenue D.O.F. No. 334/5/2015-TRU dated 27/2/2015.

The  ST rate has been now enhanced to 14% from the existing rate of 12.36%. There will be no levy of Educational Cess and Higher Educational Cess. The new rate will come in to effect from a date to be notified after the enactment of the Finance Bill, 2015. The increase of ST by 1.64% will  adversely affect the consumers, since the burden is borne by them. But it will also adversely affect the cash flow of service providers since tax is to be paid in advance under the Point of Taxation Rules (PoTR) 2011. Considering the incidence of bad debt is this sector, the service providers will  have to bear the entire tax on unrealized bills which are declared as bad debt. No change has been mad in the PoTR 2011.

The manpower supply and security services provided by individual, HUF, partnership firm to a body corporate are being brought to full reverse charge in the Finance Bill 2015. The Finance Bill has simplified the procedure by shifting the liability to pay the tax on the service provider.  Though this will not affect the cash flow of telecom companies it will simplify the procedure of settlement of ST and availing of Cenvat benefit by them. 

CENVAT Credit

There was no time limit for taking Cenvat credit on  under Cenvat Rules till last year. A time frame of six months was fixed wef 1st September 2014, which meant the service providers would loose the benefit, if they fail to take the credit within six months. Finance Bill 2015 has given some relief by enhancing the time limit from six months to one year. This will be helpful for the service providers, but still they have to ensure that the credit is taken within this period.

Another positive change in The Cenvat Credit Rules, 2004 is allowing credit of service tax paid under partial reverse charge by the service receiver without linking it to the payments of value of service to service provider as a trade facilitation measure. 

Customs & Excise Duty

Telecom sector is highly capital intensive requiring investment in both  imported and indigenous equipment. Hence changes in CD and ED will impact the manufacturing and service sectors in telecom. The  D.O.F.No.334/5/2015-TRU dated 27/2/2015 issued by the Department of Revenue contain the new tariff. Accordingly the tariff change in the following items can impact the telecom sector:

•  Standard ad valorem rate of Basic Excise Duty is being increased from 12% to 12.5%HDPE: Basic Custom Duty is being exempted on High Density Polyethylene (HDPE) for manufacture of telecommunication grade optical fibres or optical fibre cables.
•  Education Cess and Higher Education Cess levied on all excisable goods as a duty of excise under section 91 read with section 93 of the Finance Act, 2004 is being fully exempted.
•  The standard ad valorem rate of duty of excise (i.e. CENVAT) is being increased from 12% to 12.5%.
•  Education Cess and Secondary & Higher Education Cess on Countervailing Duty (CVD) on imported goods being exempted.
•  Full exemption from excise duty is being extended to round copper wire and tine alloys for use in the manufacture of PV ribbon (tinned copper interconnect) for manufacture of solar PV cells and modules, subject to certification by Department of Electronics and Information Technology (DeitY).
•  Excise duty on mobile handsets including cellular phone is being changed from 1% without CENVAT credit or 6% with CENVAT credit to 1% without CENVAT credit or 12.5% with CENVAT credit.
•  Excise duty is being reduced from 12% to 6% on wafers for use in the manufacture of IC modules for smart cards, subject to actual user condition.
•  Goods manufactured domestically and supplied against International Competitive Bidding are eligible for full excise duty exemption provided that such goods when imported attract Nil Basic Customs Duty and Nil CVD.

Unless otherwise stated, all changes in rates of duty take effect from the midnight of 28th February / 1st March, 2015.

 Swachh Bharat Cess (SBT)

There is a proposal for enabling provision to levy Swachh Bharat Cess at a rate of 2% on all or certain services vide Chapter VI/clause 117 of the Finance Bill 2015 . The Cess will be effective from a date to be notified. The Cess will be used for crating a corpus for financing the Swachh Bharat drive. There is very possibility for this cess in telecom sector, since the Attorney General has already given a legal advice to DoT in this regard in January 2015. It is also not stated whether this cess will qualify for benefit under CENVAT Rules. The cess, if imposed will result in further increase in the phone bills. If benefit under CENVAT is denied, it will be a major set back for telcos which avail many services from others as input services.

Goods and Service Tax (GST)

GST is a comprehensive indirect tax on manufacture, sale and consumption of goods and services. The GST is expected to replace all the indirect taxes. The Finance Act announced that GST would be rolled out by 1st April 2016. There is a general perception that the tax burden will increase with introduction of GST and revision of ST as 14% is in indication of the higher GST rate in the offing.

Corporate Tax

Corporate Tax has been reduced to 25% from 30%, but this benefit will not be available during 2015-16. The reduction is   envisaged in phased manner over the next 4 years starting from 2006-17. The deferral of the General Anti Avoidance Rules (GAAR)  by 2 years and the abolition of the Direct Tax Code would benefit the industry as whole.

Disinvestment

So far disinvestment was specified for loss making PSUs only, but a major shift has been made now by proposing disinvestment in profit making PSUs also. Government targets 410 billion rupees from stake sales in companies in 2015-16. The disinvestment in BSNL and MTNL, the loss making PSUs will get some new impetus now. BSNL remained the biggest loss-making enterprise during 2013-14 also, with losses mounting to over Rs 7,019 crore.

Conclusion

Though the major items wishlist of telecom sector remain unfulfilled, the Finance Bill 2015 offers some reliefs in Cenvat Rules, reduction in corporate tax, deferment of GST and GARR etc. But the increase in ST and the higher tax envisaged under GST, possibility of SBT @2% tc are worrying factors for the sector. The future of BSNL and MTNL also will depend on how Government will go further with its disinvestment plan.