Indian Telecom and Taxation

Indian telecom industry with over Rs.2.5 trillion debts is reigning under huge financial stress as it is generating revenue of only around Rs 1.5 trillion with increasing competition both from within the sector and from OTT players is inhibiting the growth of telecom companies. In addition to these government policies has made the matter worse. The main purpose of this article is to understand the current status of Indian telecom industry and how government current policies and decisions have hampered the once booming telecom industry of India.

After liberalization in 1991 and 1999 NTP policy where all the policy targets like providing equal level playing field for all players and make affordable and effective communication targets were met little has been done in implementing the policies framed by government later on. Apart from policy paralysis their regressive policies like taxing Vodafone has sent a wrong signal to foreign investors looking to invest in Indian telecom sector. Apart from this is the infamous 2G scam where lots of foreign companies who had invested in Indian telecom companies and lost their licenses due to Supreme Court ruling felt cheated by their Indian partners and Indian judicial system as many of these companies were unaware of the bribery in which their Indian partners were indulged. Along with these factors are some other factors which are acting as bottlenecks in telecom industry’s growth. Let us now look at these factors one by one.

BROADBAND

The government in the form of national telecom policy has laid down a preposterous target of providing 175 million broadband connections by the year 2017 and 600 million by the year 2020.This target comes under the NOFN project of the government which proposes a plan to connect all the 2,50,000 gram panchayat (GP) in the country through optic fiber in order to provide high-speed data which many terms as unviable since in order to achieve its’ target government has planned to invest around 20k cr while many believe it should be of 40k cr .

Also the govt. has proposed to offer this technology at 1.4 lakh per gram panchayat while Gujarat is employing this same scheme at 40 lakh per gram panchayat which led to fears of another scam in making after 2G scam. Another thing which creates the heavy bunch of cloud on this scheme is that it this project was envisioned in 2011 and was expected to be completed by oct 2013 but nothing concrete has been achieved till now. Another impeding factor has been the government’s reluctance to allow active infrastructure sharing by Infrastructure provider companies for optical fiber cable access networks which has kept these companies from investing in developing access network which requires huge capex.

Measures to improve broadband:-

  • Active infrastructure sharing should be allowed
  • Government should implement the provision of high speed Wireline broadband infrastructure in the building code of buildings like South Korea has been implementing Emblem policy which is a requirement that buildings obtain and display certification indicating the level of internet connectivity available to residents at the premise while china has made mandatory for new buildings which are to be constructed in an area where a public fiber optic telecom network is available to be equipped with fiber network connections.
  • Government can also lessen or do away with the burden of spectrum usage charges on broadband revenue.
  • Government should encourage infrastructure provider companies to build the optical fibre access networks which can be shared by multiple service providers
  • Government can look to implement Project Loon which will enable them to provide internet broadband services in rural areas at cheaper price.

SPECTRUM

Despite government making billions from auctions the quality of voice calls remains poor and nothing much can be written about broadband and data services across the country. Government has failed to efficiently allocate and utilize the available spectrum as several chunks of spectrum are lying unused with several government departments with a major chunk lying unused with Defence ministry.

Also the government has failed to provide telecom operators with contiguous spectrums which are required by higher technologies like 3G and 4G for smooth operation without any impairment. Apart from this government’s stand on spectrum sharing and trading is needed to be made clearer since spectrum sharing and trading will not only help in efficient utilization of spectrum but also will generate revenues for telcos.

Measures for Efficient Spectrum Utilization:-

  • Government should free up spectrum under the control of their departments which is largely unused for an auction to the telcos
  • Provide with telcos contiguous spectrum blocks as high speed and quality data transmission has become topmost priority for telcos
  • Policy on spectrum sharing and trading should be made clear
  • In-Building solutions/Distributed Antenna Systems should be planned for big and high rise buildings which will not only save on spectrum but also significantly improve quality of transmission

TAX

Despite telecom industry being reeling under huge debts has not government from imposing undue taxes on it. For a long time now telecom sector has been milch cow for governments of India. The taxes paid by Indian telcos are 30% of their total revenues while it is only 5% for other countries in Asia-pacific region.

What is more baffling is that the telcos have to pay Universal Services Obligation Fund of 5% for providing services in commercially unviable places, hence, rather than supporting rural mobile penetration government is rather discouraging telcos to provide connectivity in remote and rural areas. Another bone of contention is the high custom duty on import of telecom equipment, with indigenous equipment manufacturing industry relatively weaker high custom duty has been hurting telcos pretty badly.

Measures needed to be taken:-

  • USO fund levy and spectrum usage charges should be reduced or totally scrapped as these taxes are totally unjustifiable.
  • Commercial debt should be available to telecom sector as banks have reached their sectorial limits.
  • GST(Goods and Services Tax) should be introduced as quickly as possible as it can reduce the product cost by 20% which will encourage local manufacturers to manufacture telecom equipment at lower cost than foreign manufacturers enabling telcos to purchase equipment from India rather than importing.
  • Since telecom sector has been awarded the infrastructure status, it should be given benefits of this status in parity with other infrastructure sectors like tax holidays, reduced interest on debt, sourcing of funds from special funding agencies and priority availability of grid power.

Other Governance Issues:-

Government in 2010 came up with preferential market access policy which was then limited to only government sector for procurement of telecom equipment with security implications. Subsequently it was extended to private industry to give domestic manufacturing a boost. This policy send the bad signal to the companies like Alcatel-Lucent , Ericsson who have already invested heavily in our country and other companies who are looking to invest India hence posing a serious threat to foreign investment in India.

However the government in 2013 backtracked to exempt private sector from this policy, this policy needs to be completely abolished.

Other policy issue has been regarding tower installation. In order to set the tower multiple approvals are being required and there also has been delay in processing of applications. Also, multiple levies and charges are being imposed on tower infra installation resulting in a slow rollout of towers. Hence, these concerns need to be taken care of as recent estimate indicate requirement of more than 1.5 lakh towers to support increased data service demands and expansion of telecom to various parts of the country.

Hence, considering all these governance issues immediate steps are required by the new government to rectify the steps taken by the previous government and get the once blooming industry right back on track by taking all the measures discussed above into its consideration. Also, the importance of telecom sector can be attributed to the fact that every 10 percent teledensity rise leads to 1.2 percent rise in GDP rate and also telecom has been contributing at least 6.9 percent annually to GDP and employs 1.5 cr of India’s population. Hence it is imperative that immediate steps are to be taken to let Indian telecom realize its full potential and write a successful story for the Indian economy.