The Hindu Business Line : A lot to cheer about

TELECOM service providers and mobile handset manufacturers have more to cheer with the government announcing a slew of initiatives including extension of the 10-year tax holiday by another year, custom duty exemptions on capital good required for manufacturing mobile handsets and a similar exemption on mobile switching equipment for all mobile service providers.

However, there is bad news for telecom users who will have to pay a higher service tax of 10 per cent instead of the existing 8 per cent.

Mr S. C. Khanna, General Secretary, Association of Unified Telecom Service Providers of India, said: "This is a retrograde step. The telecom industry is the most taxed sector.

We are also paying between 6 and 10 per cent of our revenues to the government.

Increasing service tax will be an additional burden on the consumer." The industry had, in fact, demanded for a reduction in service tax to 4 per cent. As per Budget estimates, the government's income, from the hike in service tax on telephones, is expected to go up from Rs 3,024 crore in 2003-04 to Rs 3,518 crore in 2004-05.

"The increase in the service tax is a cause for concern for the industry. Although the Finance Minister has taken a commendable step by announcing that the credit of service tax and excise duty will be extended across goods and services, the hike will directly affect the cellular mobile subscribers who will have to pay higher tax on their mobile bills.

The stagnation of the subscriber growth levels is already a cause for concern and it is apprehended that this measure may further hinder subscriber growth," said T.V. Ramachandran, Director General, Cellular Operators Association of India.

On the other hand, the telecom industry welcomed the other measures announced by the Finance Minister.

The extension of the tax holiday under Section 80 - IA will benefit operators like Tata Teleservices and Bharti Tele-Ventures who have taken fresh licences.

The 10-year tax holiday, which had expired in March 2004, has now been extended up to March 2005 enabling companies rolling out their network within this year to avail 100 per cent deduction of profits in the first five years and thereafter 25 per cent of profits for the next five years. New players in Internet and broadband segment will also benefit from the move.

The government has also exempted customs duty on mobile switching centres for all mobile operators including those using the Code Division Multiple Access Technology. Until now, the exemption was allowed only for Global System for mobile-based cellular operators.

The move will benefit CDMA players Reliance Infocomm and Tata Teleservices. Mobile switching centre is the most crucial equipment for a mobile operator and accounts for a significant part of the investments. The consumers may indirectly benefit as the cost of operators are expected to come down following the tax breaks.

However, equipment manufacturers feel let down, as none of their demands have been met. Mr Ravi Sharma, Managing Director, Alcatel India, said, "The Government has not given any motivation to local telecom manufacturing industry in the country.

In my view, the Government has missed a chance to make use of this growth opportunity in telecom to establish India as manufacturing hub for telecom equipments."

Mr N. K. Goyal, President, Telecom Equipment Manufacturing Association said: "We are concerned that manufacturing in the telecom sector has missed the attention of the Government because the disparity and non-level playing field of higher duties on import of components and inputs vis-à-vis import of finished equipments are yet to be corrected. We had demanded for abolition of sales tax on local equipment, which would have brought us on par with imports duty structure."

Analysis

It is the turn of the telecom sector to enjoy the exalted status reserved for the software sector in successive Budgets. While the hike in the FDI ceiling to 74 per cent (from 49 per cent) in telecom is a blockbuster move, the industry has other concessions to cheer about too.

Multinational companies, such as Nokia, Alcatel, Motorola, Samsung and LG Electronics, are expected to seriously explore the possibility of setting up a manufacturing base for cellular handsets in India. The Customs duty exemption proposed for capital goods used for manufacture of handsets will pave the way for this trend.

The industry is projecting that the mobile subscriber base in India is set to scale to 100 million over the next couple of years from about 37-38 million now. As the GSM mobile subscriber base constitutes over 80 per cent of the total mobile subscriber base, the manufacturing focus will be on GSM. As the Customs duty on cellular handsets already stands at 5 per cent, the decision to manufacture or import will hinge entirely on their assessment of India's potential for telecom growth.

The continuation of the Section 80IA benefit (making profits eligible for deduction for a specified number of years) will impart greater certainty to fresh licence plans by mobile players. The exemption of customs duty for import of mobile switching centres to CDMA players (currently applicable only to GSM) will help both Reliance Infocomm and Tata Teleservices in their expansion strategy.

On the downside, however, the increase in the service tax from 8 per cent to 10 per cent will be a dampener as the existing subscribers will have to bear a higher outgo and it may also affect the industry's attempt at bringing the low-end and marginal subscribers into the mobile fold.

Krishnan Thiagarajan

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