Budget 2011: Expectations for telecom sector

By Jaideep Ghosh, Executive Director, KPMG and Puneet Punyani, Senior Consultant, KPMG

The growth of the telecommunication sector has also fueled the inclusive growth agenda with the industry seeking to make an active contribution to the development of the less advanced sections of society. Today every fifth person in rural India is connected.

During the past year, the sector has made significant contributions to the government through 3G and Broadband Wireless Auctions auctions. As a budget wish-list, telecom sector would expect that some portion of this contribution is diverted towards growth of this sector. Some of the expectations from the upcoming budget would be:

Tax holiday/Subsidies for expansion to remote areas:

Given the lower Average Revenue Per User ( ARPU) levels and low subscriber density, the business case for expansion to the rural areas is relatively weaker and is a key reason for low rural teledensity; as an incentive to provision telecom services in the rural/remote areas, government may consider tax holidays or subsidies.

Continuation of Tax Holiday benefits in case of mergers/amalgamations:

Currently the industry is going through a phase of very high competitive intensity and there is a strong likelihood of consolidation by way of mergers/amalgamations. In such a scenario, it is recommended that the benefits outlined in section 80IA should be continued and the associated restrictive provisions should be removed

Tax benefits for 3G & BWA auction fee payment

There should be clarity on the treatment of the fee payment by companies for acquiring spectrum for provisioning of the 3G & BWA services. This would cover upfront payment, interest cost on capital borrowed for the purpose of auction fee payment and also the foreign exchange fluctuation on account of overseas borrowings.

Simplification of the tax structure

The industry is subject to multiple levies (service tax, license charges, spectrum charges including universal service obligation fees, VAT, entry tax etc) and a significant portion of the revenue from the customer goes into the government kitty in terms of taxes and license fee through revenue share. In this scenario, a rationalization of the existing revenue sharing license fee regime is of utmost importance, which would help players by reducing administrative hassles and also allow them to maintain their effectiveness in the market. The industry has also been demanding that multiple levies should be phased out and replaced with a single levy, which can be implemented in a transparent manner.

Promote Local Manufacturing:

While the service sector has shown significant growth, certain elements of telecom value chain like manufacturing are currently in a nascent stage. Government may look at following incentives to promote local manufacturing:

▪ Creation of manufacturing parks: 4/5 industrial parks dedicated to telecom manufacturing including mobile handsets & devices may be set-up. These parks should provide the basic infrastructure to support the entire range of activities from production, import, local trade, export, repairs, design, research and development for both goods as well as service.

▪ Export incentives: To make India a manufacturing hub, it is important that export incentives are given to the industry.

▪ Talent development: There is shortage of skilled manpower in India for telecom manufacturing thus proactive manpower development and training policies in collaboration with OEMs may be developed. Government may set aside a fund for this purpose.

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▪ In order to promote R&D in the space of telecom government may consider following incentives:

▪ Seed money for developing R&D in India. This money may be utilized for promotion of educational research, design houses, semiconductor industry, tooling etc.

▪ Tax rebates and other exemptions (customs duty, excise duty and VAT on any inputs) for companies which set up R&D facilities in India.

▪ Subsidy on capital investment for setting up of the R&D facility.

▪ In order to attract the design houses in the field of telecom equipment, service tax exemption for the services of the R&D center utilized by other companies may be considered.

▪ Telecom passive infrastructure companies may be given similar benefits as that given to other infrastructure providers (e.g. power/natural gas distribution) and may consider tax holidays/incentives for their expansion to the remote areas

▪ There are several areas in the country where due to non-availability of power the services are either not available or commercially unviable to operate for the service providers (operating on DG sets). Government may consider some incentives/subsidies for deployment of green technologies which will not only help proliferation of telecom services to far-flung areas but also be environmental friendly and also save government on the diesel-subsidy burden.

The telecom growth seen in the last decade and success of the sector can be attributed in no small part to the several regulatory and policy measures taken by the government. The policy initiatives coupled with numerous growth-oriented steps taken by private players and other stakeholders have created a truly stimulating environment. Continuing with fiscal and other policy initiatives will further reinforce the Indian telecom story.


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