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.

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.