Telecom services: No material impact of Budget

The budget proposes to increase the MAT rate from 15% to 18% while the surcharge for corporate has been reduced to 7.5% from 10%.

Full exemption from Additional Duty of Customs of 4% (Special CVD) presently available up to 06.07.2010 on parts, components and accessories for manufacture of mobile handsets including cellular phones, parts thereof (except accessories) is being extended up to 31.03.2011.

• Service Tax Rate has been remained unchanged at 10%.
• Industry expectations: Disappointed

The telecommunications industry was expecting following major amendments/clarifications from Union Budget 2010-11:

• To change the revenue share license fee at a uniform rate of 1% of AGR against 6% to 10% currently.
• To extend the funding from IIFCL (India Infrastructure Finance Company Limited) to telecom projects including fixed line, wireless, broadband, Independent Infrastructure Providers.
• Section 80IA benefits should be made available to companies undergoing amalgamation or de-merger after 31.3.2007.
• The period during which deduction under section 80 IA can be claimed by the telecom operators should be extended to 20 years in place of existing 15 years. The association also demanded 100% exemption for successive 10 years out of the 20 years.
• Further for Tax Holiday u/s 80 IA for the new licenses issued after 31st March 2005, the period of service commencement should be extended to 1.4.2011.
• To extend Income Tax benefits under Section 80-IA to Independent Infrastructure Providers also as available to telecom operators developing their own telecom infrastructure.
• To allow set off of as additional duty of customs (SAD) of 4% against output service tax liability.
• However the sector has been largely ignored and no specific change has been made for the sector except full exemption from 4% special CVD on parts for manufacture of mobile phones or cellular phones has been extended up to 31st March 2011.

Budget impact

The increase in MAT rate from 15% to 18% in effective terms to 19.93% from 16.995% would mean higher cash outflow for the companies like Bharti Airtel, Reliance Communication and Idea Cellular.

However, the companies would get MAT credit on the amount paid for the next 10 years and benefit of which would be taken when the company starts paying tax on income tax profit rather than book profits. Currently the company would create a deferred tax asset for the MAT paid.

The proposal for extension of full exemption from Additional Duty of Customs of 4% presently available up to 06.07.2010 on parts, components and accessories for manufacture of mobile handsets including cellular phones up to 31.03.2011, is positive for the telecom services industry as it will help in achieving the key objective of the government to ensure fast spread of affordable connectivity to the rural areas due to lower cost of mobile handsets.

Further this exemption has been also extended to the mobile battery chargers and hands-free headphones.

The service tax rate has been remained intact at 10% while the general excise duty rate has been increased by 200 bps to 10%. This is good for the telecom service providers as well as subscribers, as there is intense price competition in the sector which would have make it difficult for the service providers to pass the increased service tax to specially pre-paid subscribers.

Companies to watch out for

Bharti Airtel, Reliance Communications

Outlook

The outlook for the sector remains budget neutral and in general the outlook for the sector is cloudy. However, higher rural spend will be positive for the service providers as most of the incremental subscribers are coming from rural areas.

The reduction in personal tax incidence, can facilitate higher spend on mobile usage and VAS usage by the subscribers. The lower mobile handset prices will ensure fast spread of affordable connectivity to the rural areas.