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Budget 2019: Taxation Measures To Stimulate Telecom Growth

Some key expectations for the sector from the upcoming Budget are:

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The government’s fast-tracked reforms in the telecom sector and continued proactive stance has made India the second largest telecommunications market in the world. In terms of subscriber base, India ranks second, after China, while in terms of average revenue per user, India is probably amongst the lowest in the world - a reflection of the intense competition that keeps the tariffs low. However, with high cost of spectrum, multiple levies and increased capex costs putting a strain on telcos, unless significant steps are undertaken on both regulatory and tax fronts, India may end up losing out on the contribution the sector makes to the economy. If India has to become a $5 trillion economy sooner, needless to say, telecom will be one of the pillars on which the foundation can be laid.

Equipped with the strong political mandate from the recent elections, the government can take some definitive steps to resolve long outstanding issues and also create an environment that provides the necessary impetus for next level of growth in the sector. Some key expectations for the sector from the upcoming Budget are:

  • Offering investment incentives, either by way of accelerated depreciation or by giving additional allowance in respect of capital investments, to attract foreign telecom gear manufacturing companies to set up manufacturing facilities in India. This will support the government initiative for job creation and will also boost small and medium enterprises in the sector
  • Clarifying that amendments introduced by Finance Act 2012, for royalty definition, do not apply to payments made for Interconnection Usage Charges (IUC). It is needed to clarify that payments made for bandwidth arrangements are pure service arrangements. This will go a long way in reducing litigation pending in various courts
  • Extending deduction of 200 percent of expenditure incurred on research and development in telecom, to bring in new technologies. The same should be extended beyond 2021 
  • Minimum Alternate Tax is over 20 percent and with increased competition amongst countries to attract foreign investment, there is a case for reducing not only the headline corporate rate from 30 percent to 25 percent but also to bring down the MAT rate to 10 percent. Additionally, once it is recognised that MAT is only an alternate tax, there is no reason to limit the credit for the taxes so paid and therefore the limitation of 15 years should be removed. Last but not least, with MAT rate closer to normal tax rate, restricting the set-off of book losses to lower of depreciation or business loss for computing MAT profits should be done away with and brought on par with set-off losses as under normal provisions; this will also put to rest the controversy involved in the manner of set-off
  • The payments toward spectrum and other government levies are subject to GST and with high input costs and lower revenues, telecom companies have accumulated GST input tax credits which they have not been able to set-off so far. Two limited demands from the GST Council here would be a) GST on government levies should be done away with and b) introduction of a mechanism to release input credits by way of cash or as offset against other government levies, to provide much-needed relief to the sector
  • The airtime sold by telecom companies through distributors is on a principal-to-principal basis and has been a matter of extensive litigation. In the interest of both telecom companies and the revenue authorities, special provisions may be introduced to tax the profits earned by such distributors. Further, to improve the tax base and collections in tax, such revenues may be subject to tax deduction @ 1 percent at source. Seeing the revenues of telecom companies, it is not difficult to calculate the expected increased cash in tax flows for the government

The National Digital Communications Policy, 2018 has paved the way for the next level of growth in the telecom sector. It aims to attract investments worth US$ 100 billion into the sector by 2022. However, this will be possible only with the right and timely implementation of fiscal policy and by providing the right tax framework. The Union Budget, scheduled in July, should provide certainty on the vexed issues to accelerate the growth process.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Tags assigned to this article:
Union budget 2019 taxation Union budget 2019-20

Promod Batra

The author is Partner, Deloitte Haskins and Sells LLP.

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