The Indian telecom sector is at a critical point as net adds are approaching peak while sector witnessing the fierce price competition with a flood of new launches across service areas. Lower tariffs coupled with higher channel payout by new competition, and increased incidence of multiple SIM ownership has led to all time high reported subscriber net additions.
However, the multiple SIM ownership has made conventional subscriber market share and subscriber ARPU metrics less meaningful. The incumbent service providers feel that current difficult phase of market overcapacity and hyper competition is there to stay for some time.
The consolidation seems the only viable option as at the current tariffs, the new entrants would not be able to be profitable in long term and the prevailing price war will shake out the sector and eventually work the overcapacity out and probably only the incumbents will emerge as winners. However, consolidation is still 12-18 months away until the new entrants consider that viability at such kind of low tariffs is difficult.
Industry expectations
1) General
a) Uniform License Fee
Currently, the License fee is at 6% to 10% of AGR for Access Services, at 6% of AGR for National Long Distance/International Long Distance (NLD/ ILD) services, and at 6% of AGR for Internet Service Providers. This license fee is inclusive of a 5% levy for Universal Service Obligation (USO).
COAI (Cellular Operators Association of India), sought that the revenue share license fee should be prescribed at a uniform rate of 1% of AGR and the same should NOT include the USO levy. The aspect of USO levy should be de-linked from the revenue share license fee and should be dealt with separately.
b) To encourage investment in the infrastructure sector in Union Budget 2009-10, a special thrust has been given to promote funding of infrastructure sector through India Infrastructure Finance Company Limited (IIFCL).
The industry requests that the funding from IIFCL be equally extended to all infrastructure projects, including telecom projects, whether, fixed line, wireless, broadband, Independent Infrastructure Providers (IP-1) etc., for both private as well as public sector projects.
And accordingly clear guidelines should be issued so as to facilitate funding for telecom projects from IIFCL. The same will be in line with the stated objectives of the government, including greater penetration of telecom service to rural areas.
2) Direct Taxes
a) Tax benefit under section 80-IA not available to companies undergoing amalgamation or de-merger after 31.3.2007
The existing provisions of section 80-IA provide for 100% deduction for ten years in respect of profits and gains of certain undertakings or enterprises engaged in the business of development, operation and maintenance of infrastructure facility, industrial parks and special economic zones or generation, distribution or transmission of power.
Sub-section (12) of section 80-IA provides, in the event of amalgamation or de-merger of an Indian company (which is entitled to the deduction under section 80-IA) to another Indian company, the provisions of the said section 80-IA shall apply to the amalgamated or the resulting company.
However, Union Budget 2007-2008 proposed to insert a new sub-section (12A) in section 80-IA so that the provisions of sub-section (12) shall not apply to any undertaking or enterprise, which is transferred in a scheme of amalgamation or de-merger after 31.3.2007. Because of this, the expansion by the telecom operators by way of acquisitions is likely to become tax inefficient.
The telecom industry demands that tax holiday benefits in case of mergers/ amalgamations should be continued and the Section 80 IA benefits to continue to companies undergoing amalgamation or de-merger after 31.3.2007 as well.
b) Tax Holiday under Section 80-IA
As per existing provisions of section 80-IA services should commence before 1.4.2005. The industry demands that for the new licences issued after 31st March 2005, this period should be extended up to 1.4.2011.
c) Deduction in respect of Section 80-IA
COAI further expects that 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 expects 100% exemption for successive 10 years out of 20 years, like available to other infrastructure sectors such as power, versus 100% exemption for 5 years and thereafter 30% exemption on profits of next 5 years during initial 15 years currently available to Telecom companies.
d) Deduction of upfront charges paid for 3G / BWA Spectrum
Currently any expenditure incurred for acquiring any right to operate telecommunication services (to obtain a license for rendering such services) is allowed deduction as amortized over the period of the license as the same is in consonance with the Matching Cost Concept.
In the light that the 3G / Broadband Wireless Access (BWA) auctions which are slated to take place during the current financial year, which will involve huge capital outlay, the industry will have to invest huge amounts as upfront spectrum charges and for establishing 3G / BWA networks.
Due to varied interpretations adopted at the field level the deduction U/S 35ABB is denied in certain cases to allow deduction as amortized over the period of the license. So COAI recommends that the explanation to Section 35ABB should included a new sub clause stating "License means to include upfront fee paid for acquiring license and/ or upfront fee paid for acquiring spectrum".
e) Requirement of PAN/ Form 60/61
The requirement of quoting PAN number or the need to submit a declaration in Form 60/61 as per the rule 114 B of the Income Tax Act becomes an inhibitor/hurdle for spread of service to all strata of the society. This also creates administrative problems for the service providers and in certain cases it may lead to low-end subscribers from being deprived of the service.
COAI seeks that the requirement of quoting the PAN number at the time of taking a mobile connection, as per the Rule 114 B of the Income Tax Act has become redundant and should be dropped.
f) To extend Income Tax benefits under Section 80-IA to Independent Infrastructure Providers as available to telecom operators who are developing their own telecom infrastructure and other infrastructure like roads, ports, highways, water supply projects.
3) Indirect Taxes
a) Levy of 4% Additional Duty of Customs (SAD)
Presently SAD of 4% can be availed as credit against payment of excise duty on finished products. However, in light of proviso 3 to sub-rule (4) of rule 3 of CENVAT Credit Rules, 2004, an output service provider is not entitled to claim credit on SAD against the service tax liability. While manufacturers are entitled to avail credit of this SAD for payment of excise duty on their finished goods, however, telecom operators being service providers are NOT eligible to avail credit of this 4% SAD. Hence, the 4% SAD is an added cost on the telecom service providers.
The Industry association COAI requests to insert the following wordings in the above proviso: "... except for the said proviso is not applicable in case of telecommunication service provider"
b) The industry expects that the appropriate changes should be made in the Finance Act, 1994 to allow the telecom industry to discharge service tax liability on distribution margins, similar to the one provided to millions of insurance agents.
Analyst expectations
Extension of 100% tax exemption benefits under Section 80IA from current 5 years to 10 years (at par with other infrastructure sectors) is unlikely. However, if it happens it would be positive for all the telecom service and infrastructure providers.
Section 80IA benefits, to be made available to companies undergoing amalgamation or de-merger after 31.3.2007, also seems unlikely. However, the Merger & Acquisition (M&A) norms may be framed in consultation with sector regulator. Changes in M&A norms would be positive for the sector as a whole, as consolidation is the necessary at the moment, as well as for incumbents.
Implementation of a uniform license fee Regime is also unlikely in the budget. However, the directions may be issued for license fee norms to be framed in consultation with sector regulator.
Extension of Section 80-IA benefits to Independent Infrastructure Providers as available to telecom operators who are developing their own telecom infrastructure would be positive for independent infrastructure providers like GTL and GTL Infra.
Companies to watch out for
Bharti Airtel
Outlook
While tariff declines have had a positive influence on affordability, depressed tariffs over a long period may significantly affect sector viability and sector revenues. Given the tariffs being at bottom, the usage has not been seen rising in proportion to drop in tariffs.
Considering the fact that urban circles are reaching near saturation and the incremental subscriber addition coming from rural areas the Minutes of Usage are not expected to increase astronautically going forward. Thus the pressure on ARPUs and consequentially on financial performance will continue in short to medium term.
Delay in 3G auctions has caused the condition for sector worse for the time being while delay in MNP (Mobile number Portability) implementation has only saved the incumbents from a fresh round of price war for the time being.
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