Telecom: Continue tax benefits u/s 80IA

Current status

The telecom (wireless) industry has grown by leaps and bounds during the past few years to become one of the leading mobile markets on the global map. Currently with  - 750 million subscribers, it still stands at an all India penetration level of - 60%, and rural penetration of as low as - 30%, thus providing ample growth opportunity. Of late the sector had witnessed high competition, impacting players' earnings profile.

With this the sector has become hyper competitive market with - 12-13 players as compared to - 3-4 in most other developed markets. Thus is expected to witness consolidation in near term.

Mobile number portability could affect the subscription figures of some companies but established player may not feel the pinch. Companies are expected to roll out 3G services (RCOM, Bharti and Tata have already started) but the traction generated by it is still to be seen.

Moreover, recent regulator recommendation has stimulated some uncertainty in the sector, especially with regards to recent 2G pricing and license renewal fees. However, increasing rural penetration and data services offers immense potential going forward.

With the completion of the 3G auction process and stabilizing competition, we believe the domestic environment remains strong. But high level of regulatory uncertainty (recommendations/ proposals relating to one time excess spectrum charge, high payments towards license renewal fee) coupled with spectrum shortage still plague the industry.

Industry expectations

The industry demands 100 % tax exemption under Sec. 80IA from current five years to extend exemption to 10 years.

Re-introduction of the tax holiday benefits under Section 80IA of the I-T Act to operators similar to provision that exempted operators commencing services prior to 2005.

The industry expects tax holiday benefits for M&A which are currently available in the form of tax benefits u/s 80 IA to continue In order to encourage industry consolidation, as tax benefits shall improve financial viability of mergers.

Clarity on MAT credit available under Section 115JAA of the I-T Act would continue to be available in case of merger/acquisition.

Providing tax breaks to telecom infrastructure service providers.

The industry expects clarity on tax treatment of 3G spectrum payment.

To extend Income Tax benefits under Section 80-IA to Independent Infrastructure Service Providers. Granting Infrastructure status to Independent Telecom Infrastructure Providers as a separate entry u/s 80-IA (4).

No import duty to be imposed on imported mobile handsets.

The industry expects effective deployment of USO (Universal service obligation) fund to ensure speedy roll out of telecom infrastructure in rural areas to increase rural penetration, which stands at less than 20 % currently. This move would be positive for all telecom operators.

Industry expects reduction in service tax in the broadband segment.

Analyst expectations

In order to encourage consolidation in the highly competitive telecom industry, tax benefits provided u/s 80 IA would improve the financial viability of the merger.

The tax exemption u/s 80 IA would be favorable for the sector, which is currently reeling under pricing pressures and regulatory challenges and also provide a boost to the sector due to long gestation period.

We expect relaxation in the taxation norms to telecom service providers and telecom infrastructure companies, given the capital intensive nature of the sector.

Amendments in the Income tax law, to provide depreciation claim on upfront 3G spectrum fee.

The government is expected to impose import duty on imported mobile handsets to encourage the domestic production.

The budget could announce indirect incentives for the sector by reducing the duty on capital/equipment imports or packages, which would boost disposable income levels and spur overall consumption, in turn proving to be positive for the telecom sector.

Industry expectation of reduction in service tax in the broadband segment will immensely aid penetration of broadband in Tier II and Tier III cities. However, we do not expect the government to go ahead with this measure.

Companies to watch

Bharti Airtel, Reliance Communications

Outlook

The telecom sector is currently facing lot of challenges on the competitive and regulatory fronts, relating to tariffs, M & A's and MNP implementation. Telecom is among the heavily taxed sectors in India, attracting various levies such as license fees and spectrum charges.

A uniform tax structure would help in reducing operational costs, in turn lowering tariffs, which is necessary for the next leg of growth to be led by rural India.

Click NEXT to read on . . .