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Budget Highlights - Little to offer for telecom

March 15, 2010
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While presenting the Union Budget 2010-11, Finance Minister Pranab Mukherjee noted that it is important to see the budget as a statement of policy intent rather than a statement of account. In that light, it is easy to see that despite the gaping fiscal deficit facing the country, the attempt in the budget has been to accelerate the pace of policy reforms and make the economy more competitive.

Industry experts, in fact, observe that under the prevailing economic conditions in the country, this year's budget is progressive and balanced. Corporate India agrees, and so does the country's rapidly growing telecom sector, even though it did not get much out of the 2010 budget.

Of course, the telecom industry had high expectations from the budget. The sector is, after all, one of the world's fastest growing, and has maintained its growth momentum despite the slowdown seen across various verticals. The industry is currently on an expansion spree and is adding over 15 million mobile subscribers a month. A helping hand by way of budgetary allowances and relief could have given a further boost to the industry.

The sector's pre-budget wish-list included the following: a rationalisation of the multiple taxes and levies that exist in the industry; a uniform licence fee of 1 per cent of the AGR; and reintroduction of tax exemptions for network rollout in rural areas as well as for telecom infrastructure service providers. The industry also wanted the inclusion of tower companies into Section 80-IA of the Income Tax Act to help improve profitability as well as the removal of bank guarantees for telecom.

Instead, what the Union Budget 2010 has provided for is: extension of the exemption from special additional duty (SAD) till March 31, 2011; reduction in the surcharge for corporates from 10 per cent to 7.5 per cent; retention of the service tax rate at 10 per cent; and increase in the central excise duty rate to 10 per cent.

These are all seen as positives for the telecom industry. In addition, in an effort to encourage domestic manufacturing, the finance minister has exempted mobile accessories such as battery chargers and hands-free devices from basic countervailing duty (CVD) and SAD. This is expected to give a fillip to domestic mass production of at least three key accessories –­ battery packs, chargers and hands-free (Bluetooth and wireless) headphones. These products will thus become cheaper and benefit subscribers.

Ambrish Bakaya, director, corporate affairs, at Nokia India, says, "The announcement is clearly aimed at giving an impetus to manufacturers. The benefits of this will cascade into the market, but not immediately."

The negative, according to the telecom industry, is the proposed increase in the minimum alternate tax (MAT) rate (paid by telecom players) from 15 per cent to 18 per cent.

Apart from these announcements, the budget has little to offer to the sector. Industry leaders have, however, welcomed the budget proposals, observing that they are progressive and provide the required thrust to social sector development.

Sanjay Kapoor, CEO, India & South Asia, Bharti Airtel, notes, "It is a pragmatic, broad-based and inclusive budget with a long-term focus on aggressive fiscal deficit reduction, addressal of government borrowings and continued focus on reforms. This redefines our budget as a process rather than an event. The disposable income benefits to the "aam aadmi" –­ both in urban and rural India –­ should stimulate demand for service sectors such as telecom, which in turn contribute handsomely towards the economic growth of the country.

The sentiment is more or less shared by Naresh Wadhwa, president and country manager, Cisco, India and SAARC, "The budget this year has a broad appeal, with its significant focus on inclusive growth and development at all strata. The emphasis on infrastructure development –­ both urban and rural –­ is highly visible and welcome. It is heartening to see the significant rise in the allocation for social welfare. The proposed provision to simplify the foreign direct investment model followed in India is also a welcome measure. Further, the intention of spurring research and development (R&D) across sectors paves the way for tax reforms in in-house R&D."

However, T.R. Dua, officiating director-general of the Cellular Operators' Association of India, points out that while the 2010 budget seems to be growth oriented at a macro level, "the concerns of the telecom sector with regard to the high tax burden remain unaddressed. As far as the telecom sector is concerned, the reduction in corporate surcharge will provide a minor relief, but at the same time, the increase in MAT is a major area of concern." The increase in the central excise duty from 8 per cent to 10 per cent is another area of concern and will lead to a higher cost of service. However, the continuation of exemption from basic, CVD and SAD for mobile phone accessories is a welcome step and will help increase the penetration of affordable mobile services, especially in rural areas.

In the interest of national security, the government has also cleared a three-yearold proposal to create a national test for all foreign telecom network equipment before it is sold to service providers in India. Resources have been allotted for setting up a test centre that is to be modelled on the China Information Technology Certification Centre.

Finally, the budget pronouncements saw the date for the 3G auction process fixed for April 9, 2010. If it goes through as planned, it will be a big boost for the telecom industry.

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