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Falling Short: Budget 2011-12 fails to meet industry expectations

March 24, 2011
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India’s booming telecom sector, which has been battling a series of unpleasant controversies for the past few months, had expected significant tax reforms from the government in the 2011-12 budget to support the massive telecom investments undertaken in 2010. However, with Finance Minister Pranab Mukherjee’s attention mostly on maintaining the overall growth momentum of the economy given current inflationary pressures, this year’s budget presentation did not have much to offer to the telecom sector.

Naturally, the telecom industry is disappointed. Operators, vendors and industry associations had submitted long pre-budget wish lists to the minister, which, according to them, have been largely ignored. Concessions have been provided in some categories but relief attempts have been mostly piecemeal and cursory, say industry analysts.

“The Budget 2011 covered very little on telecom, which is one of the fastest growing sectors. There were no significant steps taken on spectrum-related issues. Nor were any announcements made regarding the renewal of 2G spectrum. Further, there were no service tax exemptions on broadband, which could have increased the penetration of broadband in the country. The overall budget impact may be positive, but the lack of any tax incentives for the telecom industry remains an area of concern,” notes Parminder Kaur Saini, programme manager, ICT practice, South Asia and Middle East, Frost & Sullivan.

Among the changes the industry desired were the rationalisation of multiple taxes and levies that exist in the industry; a uniform licence fee of 1 per cent of the adjusted gross revenue; and the re-introduction of tax exemption for network rollout in rural areas. The industry also wanted the inclusion of tower companies in Section 80-IA of the Income Tax Act to help improve profitability as well as the removal of bank guarantees for telecom.

Instead, the Budget 2011-12 has provided for a reduction in the surcharge on corporate tax – from 7.5 per cent to 5 per cent. This is a welcome step in transitioning to the new Direct Tax Code (DTC) regime that will become effective from April 1, 2012.

The biggest gainers from the 2011 budget have been handset makers. Concessions on parts, components and accessories for the manufacture of mobile handsets are to continue for another year, till March 31, 2012. A few additional items have also been included in the ambit of concessions, including parts or components for the manufacture of battery chargers, PC connectivity cables and hands-free headphones of mobile handsets, and subparts for the manufacture of parts and components.

“For players like us who have a growing market in Tier II and III cities, the extension of concessions applicable to parts, components and accessories will definitely result in lowering the prices of devices; however, the overall impact will not be more than 2 per cent of the MRP,” says S.N. Rai, co-founder and director, Lava.

In order to give a fillip to the manufacturing sector, the budget announced the government’s intention of increasing the manufacturing sector’s contribution to the GDP from about 16 per cent to 25 per cent over a period of 10 years. The government is also planning to frame a manufacturing policy that will bring down the compliance burden on the industry through self-regulation, and help make the Indian industry globally competitive.

Meanwhile, for the rural sector, the government plans to provide rural broadband connectivity to all 250,000 panchayats in three years. The budget has also announced that rural telecom and rural broadband will be included in the overall allocation of Rs 580 billion (which includes other rural initiatives as well).

These steps are all being seen as positive ones by the industry. In addition, while no concessions were given to the research and development segment, the government is considering the setting up of a national innovation council under the leadership of Sam Pitroda, which will prepare the road map for innovations in India. The budget has also proposed the setting up of state innovation councils in each state that would be aligned to the central ministries.

The downside as seen by the telecom industry is the increase in minimum alternate tax (MAT) from last year’s 18 per cent to 18.5 per cent. This will increase the tax burden on most telecom companies. Further, MAT will also be applicable to developers (builders) of special economic zones (SEZs) and units operating in SEZs.

The industry had been hoping for an exemption of service tax on broadband to give a boost to the segment. Instead, the finance minister has added more services to the tax net in a bid to ensure a smooth transition to the goods and service tax (GST) regime. The government’s commitment to reducing the digital divide by ensuring rural broadband connectivity and increasing the penetration of household broadband in three years has appeased the industry somewhat. Says S.C. Khanna, general secretary, Association of Unified Telecom Service Providers of India, “No tax benefit for the sector has been announced, though village broadband has been taken into consideration.”

Apart from the above announcements there was little for the telecom sector. “The reduction in the surcharge on corporate tax will hardly be a carrot for an industry that was looking forward to a more broad-based change. More specifically, the industry was expecting clarity on corporate tax treatment of spectrum charges and the associated borrowing cost, along with tax holiday benefits on consolidation, so as to create a more level playing field,” says  Rahul Kashikar, senior tax professional, Ernst & Young.

“We, in the wireless sector, are deeply disappointed that the industry that has provided so much to national development and has made India the second largest and fastest growing telecom market in the world, has not received the encouragement and nurture befitting such an important engine of economic development and nation building,” says Rajan Mathews, director general, Cellular Operators Association of India. 

Despite the disappointment, industry leaders have overall welcomed the budget proposals for 2011, claiming that though the telecom industry’s demands were overlooked, the budget does provide the right thrust to social development. As Sunil Bharti Mittal, chairman and group CEO, Bharti Enterprises, says, “The finance minister has made an honest effort to reconcile the two seemingly conflicting objectives of maintaining the growth momentum and containing the inflationary pressure in the economy. As expected, no big-bang reform measures were announced but the future rollout schedule of key initiatives has been delineated. The finance minister has announced a road map for the implementation of GST; one hopes that the much-needed constitutional amendment goes through smoothly. The fact that the DTC will finally be coming into force from April 2012 is welcome.”

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