Opinion: Telecom Industry Eyes Reforms for Digitising India

The new Government has launched the 'Digital India' and 'Make in India' campaigns to rev up the economy, boost investor confidence and re-chart India growth story. Both these campaigns provide significant opportunity for transforming the country's telecom sector and spearhead the economic growth for the country.

Whilst the sector has witnessed clarity on several regulatory issues in the recent past, i.e., including mergers and acquisitions guidelines, Foreign Direct investment (FDI) relaxation, the tax (both direct and indirect) related concerns of the industry have remained unaddressed for a long time. With the new Government presenting its first full term budget Union Budget, the expectations are very high for turning its 'Achhe Din' vision into a reality.

The key expectations of the telecom industry are:

Availability of tax incentives
Considering that the telecom sector is a highly capital intensive, conferment of tax incentives would provide the much needed impetus to the sector. The incentives could be in the form of introduction of the tax holiday benefits (i.e. Section 80IA) for the existing telecom operators, as also, granting 'infrastructure status', thereby tax holiday benefits to infrastructure sharing companies and telecom equipment vendors.

Further, to promote the 'Make in India' campaign, tax incentives should also be announced to encourage domestic manufacturing of mobile handsets, telecom equipment, including fostering indigenous Research and Development and intellectual property rights creation.

Clarity on withholding tax related issues
The telecom industry, whilst being one of the leading sectors contributing to the economic growth of the country, it has also been the most litigation prone sector from a tax withholding perspective.

Retrospective amendment to the 'Royalty' definition by enlarging the scope of the term 'process' to include transmission by satellite, cable, optical fibre or by any other similar technology, whether or not such process is secret, has further increased the withholding tax litigation in respect of standard telecom payments. This amendment has not only increased the  tax burden for operators; as in many cases telecom operators are unable to recover the tax from the recipients, it has also created uncertainties in compliance with the withholding tax obligation for the earlier years.

These issues should be addressed by rationalising the withholding tax rates (by way of introduction of a uniform/ lower tax rate)/ provisions (by providing clarity on the exact applicable provisions) and issuing necessary clarifications to this effect.

Restoration of the custom duty exemption
Withdrawal of customs duty exemption in the last Budget on specified telecom products has adversely impacted the sector.  Given the rapidly changing technological environment coupled with the need for increasing tele-density and penetration in the sector, the customs duty exemption should be restored for all telecom products in the proposed Budget.

Availability of CENVAT credits
It is likely that to bring about an increase in the overall tax collections, the Government may increase the indirect tax rates in this Budget.  However, the availability of corresponding CENVAT or central value added tax credit on several inputs and input services may be a concern having regard to the current trend in this context. Thus, it is expected that the government should address this concern by allowing CENVAT credit for all capital goods, inputs and input services to the extent they are used for rendering taxable services.

Thus, whilst the Telecom industry is gearing up to explore the vast opportunities available in the sector, it is hopeful that the Union Budget ushers in the much needed tax reforms to provide a boost to the sector and propel inclusive growth to the Indian economy.

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