Budget was neutral towards telecom sector

The telecommunication industry is growing at a neck break speed with leading players lapping up mobile subscribers by millions. The country's telecommunication market is the 4th largest in the world in terms of wireless subscribers and 5th largest in terms of total telecom subscribers (Source: Bharti Airtel presentation).

After growing its wireless (GSM and CDMA) subscriber base at a CAGR of over 122 per cent during the period January 2004 to January 2007, the country is expected to take the number to 500 m telecom subscribers by the end of March 2010. It will be aided in achieving this by the availability of cheaper handsets, focus of regulatory measures to take telephony to rural markets, lower tariffs and general buoyancy in the economy.

Budget Measures

	Developers and suppliers of content for use in telecom to be brought under the purview of service tax
	Department of Telecommunication asked to constitute a committee to study the present structure of levies and make suitable recommendations to the government with regards to the applicability of a unified and single levy on the revenue
	Nil additional duty of customs, on parts, components and accessories of mobile handsets including cell phones, being extended upto 30th June 2009
	Hike in dividend distribution tax from 12.5% to 15% on dividends distributed by the companies
	Additional cess of 1% on all taxes to fund secondary education and higher education

Budget Impact

	With developers and suppliers of content being taxed, the cost of content is set to rise as also the cost of the value added services (VAS) that are rich in content
	If the proposed committee approves the case of single levy for the telecom sector it will be a big positive for the sector (reduction in tax levels) as also for the government (lowering of administrative burden)

Sector Outlook

The budget has been more or less neutral towards the telecom sector. The levy of service tax on providers of content to the telecom sector may in the short run stymie the off take of value added services but this is not a major concern at the moment as the companies are more focused on organic growth and subscriber congregation. The finance minister has acknowledged the demands of the telecom sector to have a single levy instead of the current multiple levies and has also proposed to the Department of Telecommunication to set up a committee to look into the present structure and make suitable regards to the government with regards to the same. If the proposal of single levy goes through, it could usher in respite for the telecom service providers. With the government envisioning a telecom subscriber base of 650 m by 2012 in the economic survey yesterday it looks like the government is going to put its best foot forward in helping the sector to thrive.

Company Impact

	Currently none of the major telecom companies are paying out dividend owing to their turbo charged expansion plans that require them to entail huge capex. As such, the increase in dividend distribution tax is not expected to impact the companies in the near future.
	All companies will have to bear the burden of additional 1% cess for higher education
	Reliance Communication carries out the content development in-house. So, despite it having to bear the load so service tax it will be in a position to offer value added services at more competitive rates as opposed to its peers due the absence of revenue sharing agreements that its peers have with the content providers

Industry Wish List

COAI - Cellular Operators Association of India

Revenue share license fee should be reduced to 6% (including USO levy of 5%) and brought down further in the coming years.
Multiple levies imposed on the sector should be replaced with simple investor friendly and industry friendly tax structure.
Exempting the telecom software being imported by telecom service providers from the 8% CVD (countervailing duty) currently imposed.
20% limit on CENVAT credit for telecom sector should be removed.
MAT credit should not be restricted to the extent of the difference between the normal tax and MAT in that year.
TDS and Service tax should not be applicable on the interconnection usage charges paid by companies.

Budget over the years

Budget 2004-05	Budget 2005-06	Budget 2006-07

FDI limit in the sector increased to 74% from 49%. Customs duty exemption on mobile switching centers imported by telecom service providers now extended to universal access service providers. Service tax increased to 10% from 8%. 2% education cess on direct and indirect tax.	Bharat Nirman Project to give telephone connectivity to the remaining 66,822 villages through BSNL. A provision of Rs 12 bn for USO Fund in FY06 for telecom. Mobile telephone removed from the 1/6 criterion for filing income-tax returns. Custom duty on copper reduced from 15% to 10%. Custom duty and CVD exemption on parts, components and accessories of mobile handsets including cellular phones continued. Customs duty exemption for specified telecom network equipment and parts thereof, if imported by TSPs, extended beyond March 2005 without any specified time limit. Custom duty on optical fibres and optical fibre cables reduced from 20% to 10%.	Estimated outlay for Jawaharlal Nehru National Urban Renewal Mission to be Rs 62.5 bn during 2006-07, including a grant component of Rs 45.9 bn. Through this mission, the government intends to promote establishment of new towns, preferably focused on a specific industry (IT) or a specific theme (education or health). Telecommunication to reach 250 m connections by December 2007. Provision of Rs 15 bn for Universal Services Obligation Fund in 2006-07 More than 50 m rural connections to be rolled out in the next three years. Peak rate of customs duty on non-agricultural products has been reduced from 15% to12.5% with a few exceptions. The rate of service tax is being raised from 10% to 12%.
[Read more on Budget 2004-05]	[Read more on Budget 2005-06]	[Read more on Budget 2006-07]

Key Positives

	Connecting India: The telecom sector has been one of the fastest growing sectors in the Indian economy in the last 4 years. This has been witnessed due to strong competition that has brought down tariffs as well as simplification of policy environment that has promoted healthy competition among various players. Due to this reason, telecom density in the country has risen to over 17.0% at the end of January 2007, from 3.6% in March 2001.
	It's ringing mobile: The Indian mobile sector has been growing rapidly and has emerged as the fastest growing market in the whole world. Currently of a size of 156 m subscribers (GSM and CDMA), this sector is expected to reach a size of nearly 200 m subscribers earlier than the schedules date of December 2007. The increasing monthly addition to the subscriber base (currently at around 6 m) is indicative of the same.
	Consolidation trend: The Indian telecom industry recently witnessed its biggest deal (Vodafone bidding US$ 11 bn for 67% stake in Hutch-Essar). The consolidation trend is likely to continue in the near future as bigger players vie to increase their subscriber base and reach.
	Broadband push: The government is expected to increase its thrust on the use of Internet. This will come about as PC penetration increases. The year 2007 has also been declared as the 'year of broadband' and we are likely to see some positive measures being initiated to increase broadband usage in the country.

Key Negatives

	Spectrum woes: The telecom sector continues to expand at a rapid pace adding coverage and increasing teledensity as more and more people get connected. However, as subscriber base continues to swell and the need for wireless data transfers over mobile grows, the operators are likely to face increased shortage in spectrum availability (as they are facing now). This problem is especially acute in urban areas, which have got higher teledensity.
	Highly taxed sector: The COAI (Cellular Operators Association of India) has indicated that the telecom sector, especially the cellular services segment, continues to pay very high duties and levies. Currently, the sector is paying duties and levies under various heads including annual license fees, spectrum charges and access deficit charge (this has been partly reduces of late). In addition to the above, significant levies are also imposed on the industry on account of sales tax, service tax and import duties on handsets and other telecom hardware. Shockingly, the total regulatory charges levied on the sector works out to be between 17 to 26% plus the Goods and Service Tax (GST).

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