The wish list was long- industrial status for telecom sector, treatment of 3G spectrum fee payment as “Intangible asset”, TDS exemption for discount / margin retained by the distributors in Prepaid Model, TDS exemption for IUC payments, Cenvat credit to tower/tower parts/shelters and SAD on imports, tax exemption for telecom manufacturers, Excise Duty exemption for OFC, Customs Duty exemption for parts/components of mobile phones, abolition of service tax on internet and broadband services, rationalization of levies and duties for mobile telcos, uniform annual revenue share of 6-8 etc.
The telecom sector was eagerly waiting for the budget speech of the Finance Minister in the parliament. The telecom sector had reasons to hope for some incentives. The telecom sector is recognized as an impetus for national development and it contributed nearly 2% of country’s Gross Domestic product (GDP). The introduction of wireless communication services created a crucial demand-supply gap which triggered phenomenal value hike of airways. But this has also burdened the operators with heavy cash outflow which was not commensurately compensated with cash inflows. The cancellation of 122 licences bundled with 2G spectrum by the Supreme Court in February 2012 with specific direction to the Government to auction the 2G spectrum was a major setback for many telecom service providers. The Economic Survey predicts a decline of 85 % in 2011-12, on account of the sharp rise in the industry's interest outgo and higher depreciation charges due to the heavy borrowings for acquiring 3G licences and rolling out 3G services. The increasing tax burden and the tax related litigations also worry the sector.
Revenue generation
The liberalisation which started with NTP 99 opened up new streams of revenue to the nation in the form of licence fee and spectrum charges. The auction of 2G and broadband spectrum fetched `1,08,000 crore in 2010-11 which was three times the estimate. The budget of 2011-12 had initially estimated to generate ` 29648 crore from spectrum auction. The target was subsequently reduced to `16,551 as the proposed auction of broadband spectrum did not materialise during the year.
The budget proposals for the fiscal year 2012-13, envisage generation of ` 58,217.33 crore from the telecom sector, out of which `18000 is expected from licence fees and other usage charges and remaining `40,000 crore is from auction of 2 G spectrum. BSNL has already offered to surrender part of the broadband spectrum, which the government plans to auction during the 2012-13. The proposed auction of 4G spectrum in the 700 mega hertz band (LTE-Long Term Evolution) and levy on 2G spectrum holding beyond 6.2 mega hertz by existing operators are also expected to generate considerable revenue during 2012-13.
Infrastructure Industry status
The telecom sector is a fast growing sector with significant capital investment in the infrastructure. As per Telecom Regulatory Authority of India (TRAI), the telecom market demand in the country is expected to grow by 150% in the current fiscal year, ie. from ` 68,697 crore in 2011-12 to ` 170,091 crore by 2019-20. The interesting part is that the major beneficiaries are foreign manufacturers since 97% to 98% of the investment is in imported equipment and components/modules imported and assembled in India and sold as ‘Indian Product’. When the estimated investment made in telecom equipment inducted in to the network during 2011-12 was about ` 55,000 crore, the share of products of Indian manufacturers was a `1400 crore only, which is hardly 3%. The telecom industry has been demanding ‘Industrial status’ for the last few years, a demand strongly supported by Department of Telecommunications also. The working group or the 12th Five-Year Plan on telecom also had suggested the grant of infrastructure status for the sector, besides the creation of a Telecom Finance Corporation to finance the industry. As per the working group, the total investment during the 12th FYP would be about ` 6,50,000 crore. While PSUs would invest ` 1,10,000 crore, the private sector would invest ` 5,40,000 crore during the plan period. The industrial status would have been beneficial to the telecom sector in revitalizing the domestic manufacturing sector, obtaining foreign funds as well as domestic bank credits for its capital investments, besides some tax incentives.
But there was no declaration of ‘industry’ status t the telecom sector in the budget speech.
Viability Gap Funding (VGF)
The scheme of Viability Gap Funding (VGF) announced in 2004 aims to ensure wide spread access to infrastructure provided through the Public Private Partnership (PPP) framework by subsidising the capital cost of their access. The Scheme provides financial support in the form of grants, one time or deferred, to infrastructure projects undertaken through PPP with a view to make them commercially viable. The Scheme provides total Viability Gap Funding up to twenty percent of the total project cost.
The budget 2012-13 extended VGF for mobile towers and underground cable (including Optic Fibres). In spite of financial support from Universal Service Obligation (USO) fund, the roll out of telecom towers in rural areas was below the desired level. The VGF for towers and OFC would enable the service providers to ensure faster roll out of telecom towers in rural areas and also strengthen the high bandwidth digital network. The actual impact of the scheme will depend on the eligibility conditions and other modalities of the scheme.
Taxes- major changes
The telecom sector is already burdened with multiple and high tax levies which account for 30% of the telecom services revenue, which is very high from a global perspective. The ambiguities in the rules resulted in varied interpretations leading to litigations. The telecom industry was demanding rationalization of the tax rules and more incentives on taxes.
Income Tax
There is no change in the rates of corporate tax (including surcharge and cess) for domestic and foreign companies.
Amendment of Sn 9 of IT Act 1962: Among the proposals, the notable one is the amendment of section 9 the IT Act 1961 which will make all persons, whether resident or non-residents, having business connection in India to deduct tax at source and pay it to the government even if the transaction is executed on a foreign soil. With this amendment any asset which is registered or incorporated outside India shall be deemed to be situated in India “if the share or interest derives, directly or indirectly, its value substantially from the assets located in India”. The amendment aims at taxing overseas mergers and acquisition relating to domestic assets with retrospective effect from 1st April 1961.
In telecom sector, the immediate implications will be on Vodafone. It will automatically make Vodafone liable to pay ` 11,000 crore as income tax on its acquisition of 67% stake in the Hutchison-Essar Ltd (HEL) from Hong Kong-based Hutchison Group through companies based in the Netherlands and Cayman Island. Though Mumbai High Court had upheld the government’s withholding of ` 11000 crore as tax on this cross border deal, the Supreme Court set aside the governments demand for tax and quashed the Mumbai High Court’s order. After the review petition filed by the government in February 2012 was also dismissed by the apex court, the only recourse for the government was to amend the IT Act 1961. The amendment gives legal backing for tax claims on all cross border deals for software procurements and all forms of transmission services through cable/satellite media with retrospective effect. Though the amendment is with retrospective effect, the government cannot reopen tax cases beyond six years as per the IT Act. This has been subsequently confirmed by the Finance Minister.
Payment of Advance Tax: Under the existing rules, the amount of advance tax payable is arrived at by reducing the amount of income tax deductible or collectible at source, from the tax payable, irrespective of whether such tax is actually deducted or collected. Finance Bill 2012 proposes to amend this provision to provide that advance tax shall be payable unless taxes have actually been deducted or collected.
Royalty-new definition: Treatment of ‘royalty’ for Income Tax purpose has been an issue of dispute with conflicting rulings by the various judicial bodies. To dispel the confusion, the definition of ‘royalty’ is amended in the following manner:
Royalty includes:-
Ø Consideration for any right, property or information whether or not possessed by the payer, directly used by the payer or located in India.
Ø Transfer of all or any right for use or right to use computer software (including granting of a licence) is in the nature of royalty irrespective of the medium through which such right is transferred.
Ø The term 'process' in the royalty definition to include transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fiber or by any other similar technology, whether or not such process is secret.
Since, the amendment is with retrospective effect from 1st June 1976, it will have impact on all past income/expenditure towards use of any software, information, databases, satellite transmission (up and down linking), transmission through cable media etc.
Income from other sources: When a company in which public are not substantially interested, receives a consideration for issue of shares from an Indian resident in excess of face value of its shares, the aggregate consideration received for such shares in excess of the fair market value of the shares will be chargeable to tax in the hands of such company. The impact will be on joint ventures with a non-resident participation or foreign investments in Indian companies in form of private equity or such other route with lower than 100% interest.
Service Tax
The two important changes in Service Tax are;
Ø replacement of positive list by a negative list as the basis of taxation
Ø enhancement of service tax from the existing 10% to 12%.
The replacement of the positive list with a negative list of services exempted from service tax is a consequence of widening the tax net to new areas, hitherto enjoyed tax exemption. This would make all telecom services including inter-operator barter of services, services provided by non-telegraph agencies like out roaming and IPLC services etc. The applicability of service tax on license fee and spectrum charges may also come up.
The enhancement of service tax will make the telephone bills costlier by 2%. If the increase in per minute call rate in turn results in a corresponding decrease in per minute usage per user, it will adversely affect the revenue of the service providers.
Though the service tax is ultimately borne by the subscribers, this will also aggravate the cash outflow of service providers since the payment of service tax is on accrual basis after enactment of the Point of Taxation Rules (POTR) 2011. Under POTR 2011, the service providers have to pay service tax on services rendered/bills generated without waiting for its payment by the subscribers. While the rules provide for adjustment of tax on cancelled/revised bills, there is no exemption on unpaid bills written off as bad debts.
Considering the higher incidence bad debt in India which is twice the global average, unless effective measures are taken to reduce the bad debts, it will result in a further dent of 2% revenue.
Definition of ‘Continuous Service’: The telecom sector continues to be confronted with lot of service tax related disputes and litigations. The POTR 2011 created new issues related with the billing of services, tax adjustment/refund on cancelled/revised bills and claims written off as bad debts.
The following changes are made with effect from 1st April 2012:
Definition of 'Continuous service' amended to include recurring service. Time for issuance of invoice increased from 14 days to 30 days from the date of completion of service with the aim to extend the point of taxation. Rule 6(4B) of Service tax Rules (adjustment of ST) liberalized by enhancing the monetary limit of adjustment to ` 200,000 There will be no monetary limit on self-adjustment of excess Service tax paid if it does not involve interpretation of law, taxability, classification, valuation or applicability of exemption notification. This would reduce the delay in utilization of excess Service tax payment. Time period of realization of export proceeds aligned with the period specified/ extended by RBI.
Place of Supply Rules (POSR)
The existing Export and Import Rules will be replaced by Place of Supply Rules (POSR), which prescribe parameters for a service to qualify as export and import. Accordingly, in case of telecommunication services provided to subscribers, the place of provision of service shall be the location of service provider.
Cenvat Credit Rules 2004
With the introduction of Negative List, more services become taxable, but no changes in the existing Cenvat Credit Rules on ‘Input Services’ eligible for Cenvat credit, have been proposed in the budget. If the scope of “Input Services’ is not widened to include the new services, it will adversely affect all service providers.
The changes made in the Cenvat Credit Rules from 1st April 2012 are:
Ø Amount to be paid under Rule 6(3) of CCR i.e. reversal of Cenvat Credit on account of provision of exempted activities increased from 5% to 6%.
Ø Slabs at which Cenvat credit is to be reversed is prescribed when Capital goods are sold as waste or scrap - applicable from 17 March 2012.
Ø Input service distribution to be done on proportionate basis.
Ø Payment of interest on credit wrongly "taken or utilized" changed to credit wrongly "taken and utilized". Hence, no interest liability unless credit is wrongly utilized.
Ø Rule 6 (6A) of CCR to have retrospective effect, applicable from 10 February 2006. Pending disputes i.e. whether the service provider was required to reverse the Cenvat credit on provision of taxable services to SEZ developers and units would now be resolved.
Ø Simplified procedure for claiming refund of unutilized credit towards Export of Service - Rule 5 of CCR substituted with effect from 1 April 2012. No more requirement to provide corelation of input services with the output services. Detailed notification to follow.
Ø Refund computation methodology shifts to "payment received in the refund period" from "billing being taken as the basis for computing refund". Clarity would be required on how to do transition.
Ø Service tax returns required to be filed monthly instead of half-yearly. Compliance procedure will increase. New format for Service tax registration and returns proposed.
Ø Provisions of Settlement Commission introduced for Service tax assessee.
Ø Introduction of provisions relating to special audit in the Service tax law on the lines of Central Excise Act, 1944.
Ø Normal period of demand increased from 12 months to 18 months.
Ø Provisions of filing appeal to Commissioner (Appeals) reduced from 3 months to 2 months.
Ø Proposal empowering authorities to direct the "person liable to pay Service tax" to have its book audited by a specified chartered or a cost accountant.
Customs Duty
Standard rate of Customs duty is maintained at 10%. Method of computation of "Education Cess" and "Secondary and Higher Education Cess" on imported goods has been simplified and the levy of these cesses are exempted on CVD.
Nil SAD duty
The import of following will attract ‘nil’ SAD:
Ø Microprocessor on computers, other than motherboards,
Ø Floppy disc drive; hard disc drive; CD-ROM Drive; DVD drive or DVD writer; flash memory; combo drive
Ø Information technology software, other than that on floppy disc or cartridge tape
Electronic integrated circuits, LED lights and lamps, subject to fulfillment of notified conditions.
The budget also proposes exemption of basic customs duty on mobile phone parts/components and memory cards. This will not have any impact on high end mobile handsets since more than 90% of its kind are manufactured abroad and imported in to the country as final products. But the exemption will help the domestic manufacturers of low end handsets to import the parts/components at a lesser cost. This will encourage penetration of mobile phones in rural areas.
Excise Duty
The Standard rate of Excise duty is increased from 10% to 12%. The concessional Excise duty rate of 2% without Cenvat credit is being extended to parts, components and specified accessories viz. battery chargers, PC connectivity cables, memory cards and hands-free headphones of mobile phones.
Tax exemption for R&D
The extension of weighted deduction of 200 per cent for R&D expenditure in an inhouse facility for a further period of 5 years beyond March 31, 2012 would encourage more investment in R&D activities. The major beneficiaries are LG, Nokia, Samsung, and Qualcomm etc.
Other plans
Some of the plans announced in the budget 2012-13 which will have a positive impact on telecom sector are the launching of mobile-based Fertilizer Management System (mFMS), incentives for solar power, increase in allocation to Defence sector etc.
mFMS will provide end to-end information on movement of fertilizers and subsidies. The scheme will help mobile service providers. The incentives for tapping solar power will reduce the cost of telecom operators in ensuring solar power backups to remote installations including Rural Community Phones (RCPs) and Village Panchayat Telephones (VPTs) installed under Universal Service Obligation (USO) scheme. The allocation of ` 1.93 lakh crore to the Defence sector will also help telecom companies engaged in supply of software and digital signaling devices.
Disinvestment
The government plans to raise ` 30,000 crore through disinvestment during 2012-13 and a significant part will be from telecom PSUs. The government could manage only about ` 13,895 crore from part-sale of stake in PSUs during 2011-12 against the target of ` 40,000 crore. The Finance Minister has clarified that the government would retain not less than 51% of share capital in the PSUs.
Conclusion
The budget speech evoked mixed responses from the telecom sector. While the budget 2012-13 is generally perceived as a neutral one for telecom sector, we cannot disregard the thrust given to the rural telecom sector through VGF to telecom towers, incentives for solar power, exemption of basic customs duty to mobile phone parts/components etc. The sector will continue to be burdened with higher taxes and tax related litigations. The long awaited ‘industry status’ has not meterialised and most of the items in the wish list of telecom sector remain as such.
R.Jayaprakash
