Finance Minister P. Chidambaram's budget for 2006-07 may not exactly be path-breaking, but it gives just the right nudges to push the country ahead on a growth path. For the telecom industry though, the budget has little to offer; in fact, it has been by and large ignored.

For one of the fastest growing sectors in the country, the budget has been a bit of a damper. Its expectations for relief in the multi-tiered taxation structure prevailing in the sector have been summarily dismissed. As have the expectations of a reduction in licence fee to 6 per cent from the present 10 per cent, 8 per cent and 6 per cent of adjusted gross revenue (AGR) for A, B and C circles respectively, though there were indications that both these issues would be tackled in the current budget.

As telecom analyst Mahesh Uppal says, "The budget has not been responsive to the industry's needs and this could impact the exponential growth witnessed by this sector."

Take taxation, for instance. The telecom industry has for long been clamouring for a simpler taxation regime. As a run-up to the budget, several presentations were made to the finance minister to consolidate the multiple duties levied in the sector into a maximum of three levies over the next few years before moving on to a single-tax regime in 5-10 years' time. At present, telecom companies are charged as many as eight different levies, which work out to roughly 21 per cent of their AGR ­ amongst the highest in the world. In addition, operators have to pay an import duty of 16 per cent on infrastructure and 5 per cent on handsets. This takes the total quantum of taxes paid by the industry to 24-28 per cent of the AGR.

Instead of addressing this issue, the budget, by increasing the service tax from 10 per cent to 12 per cent, will further increase the already high taxes in the sector. The sting of this will be felt by the end-users, who pay at least 30 per cent of their actual phone bills as taxes.

The budget is more favourable to the manufacturing segment for both telecom equipment and IT manufacturers. The other benefit that the telecom industry has received is through the emphasis on rural development. While presenting the budget, the minister stated that the telecom sector in India is recording one of the fastest growth rates in the world, and has achieved a teledensity of 11.75 per cent (as of January 2006). To help meet the target of reaching 250 million connections by 2007, more than 50 million rural connections would need to be rolled out in three years and thereafter connections could be available on demand. "The digital divide between rural India and urban India will be bridged," Chidambaram stated.

To achieve this, the budget has guaranteed a provision of Rs 15 billion from the Universal Service Obligation (USO) Fund in 2006-07 for rural rollout. This is higher by 25 per cent over the current year.

As of now, the largest chunk of the USO Fund goes to the state-run Bharat Sanchar Nigam Limited (BSNL) for its rural telephony operations. Of late, private companies like Tata Teleservices and Reliance Infocomm too have bagged projects to cover 6 million villages by 2007.
This trend, according to Chidambaram, is likely to continue. Cellular service providers have also been covered for financial assistance from the USO Fund for expanding services to rural areas.

Further, it was announced that the communications minister would introduce a bill in Parliament amending the Telegraph Act to extend financial support to infrastructure for cellular telephony in rural areas. At present, it only provides for support for basic services. This move has been welcomed by the industry.

However, rumblings of dissent are also being heard. For one, there is discontent over the fact that though the USO Fund has collected more than Rs 50 billion in levies from telecom service providers, the allocation in this budget is a mere Rs 15 billion. The remaining amount is to be retained by the government.

Telecom operators are hoping their dissatisfaction will be noted by the finance minister and there is a review of the budget. Their hope may not be entirely misplaced. A day after the budget presentation, Chidambaram indicated that he may consider a review and asked the operators to draw up a list of the unresolved issues in the telecom sector. The industry has for long been clamouring for a simpler taxation regime and a reduction in licence fee. Instead, by increasing the service tax from 10 per cent to 12 per cent, the budget will further increase the already high taxes in the sector.

Industry Speak

Sunil Bharti Mittal, Chairman and Group Managing Director, Bharti Enterprises
Overall, it is a balanced and growth-oriented budget. It takes into account the aspirations of new India and ensures that the purse-strings are open for all segments of society. Yet, it very deftly manages to maintain fiscal discipline. The thrust on development of agriculture and the infrastructure sectors is welcome. The rollout of several education and rural development initiatives will ensure that the benefits of development reach everyone. For the telecom sector, all of us were expecting a reduction in the tax burden on the consumer by way of reduced licence fee, which has not happened.
Moreover, the service tax has been increased from 10 per cent to 12 per cent. It is widely acknowledged that increased penetration is vital for economic development. I do hope there is a reconsideration of this matter by the finance minister.

Vikram Mehmi, CEO, Idea Cellular
We are happy that the finance minister has recognised the need for investment in the area of rural telephony to reach the ambitious target of 250 million subscribers by 2007. We look forward to the bill with specific regard to cellular mobile telephony to add impetus to rural teledensity. However, we would have liked a reduction in the statutory fees to make services more affordable.

S.C. Khanna, Secretary-General, AUSPI
From the view of the telecom service industry, the budget can be termed as a "status quo" budget. The telecom sector was expecting some relief from the high incidence of taxes and levies, but this has not found any support in this budget. This sector has the lowest average revenue per user in the whole world, and has been falling for the last many years. At the same time, it contributes taxes and levies to the tune of 17 to 21 per cent, plus GST. AUSPI expected a reduction in these levies in order to benefit end-customers and hence increase penetration and improve the competitiveness of the Indian economy.

Unfortunately, the telecom sector has been further burdened with an increase in service tax to 12 per cent. This increase in service tax will enhance the corresponding tariffs. Telecom is a flourishing industry which contributes about 30 per cent to the country's service tax. The industry very much expected relief in this direction. It also expected a reduction in the revenue share licence fee for the sector to 6 per cent, which has been supported by the Department of Telecommunications. However, this has not been forthcoming in this budget.

Even though the USO Fund has gathered more than Rs 50 billion as levies obtained from telecom service providers, the allocation in this budget is merely Rs 15 billion. The rest of the amount has been kept with the Government of India. The telecom industry expected the entire amount collected as levy for the USO Fund to be utilised for the development of rural communication, thereby reducing the digital divide. In other words, the telecom service industry is adding a phenomenal 5 million subscribers per month and contributing substantially to the growth of the economy, but it has not received due acknowledgement of its role in this budget.

Mahesh Uppal, Director, TCIS
Overall, the budget has been disappointing with respect to telecom. For instance, it was expected that levies would come down, which did not happen. Further, service taxes have experienced a hike. It can be said that the finance minister paid more attention to other sectors and telecom was left alone. Therefore, telecom has not done very well.

Wing Commander B.G. Bhalla, General-Secretary, VSAI
The move by the government to use Rs 15 billion from the Universal Service Obligation Fund to provide 50 million telephone connections in the next three years is very positive. However, in order to truly remove the digital divide, the government should ensure that it adopts the right technology platform, so that it converges the teledensity targets with the empowerment of rural India by giving access to citizens through e-governance initiatives. In a developing country like India, it is important to leverage the limited resources available and build sustainable models to maintain and run this infrastructure.

Deepak Kapoor, Executive Director, PricewaterhouseCoopers
The Rs 15 billion allocated under the USO Fund and the proposed amendment to the Indian Telegraph Act to bridge the urban-rural teledensity divide will have a positive impact on the sector. The money collected from the sector, which was till now lying unutilised, can be channellised towards increasing rural teledensity.

Telecom has not been made at par with other infrastructure sectors in terms of getting 100 per cent tax exemption for a period of 10 years in succession. There has been no resolution of the issue of double taxation (VAT and service tax) on SIM and prepaid cards. The definition of adjusted gross revenue (AGR) for the purpose of calculation of licence fee is not restricted to service revenues and still includes revenue from sale of handsets, interest income, etc. The hike in the service tax rate by 2 per cent will mean costlier telephone services due to a higher bill value to subscribers. The increase in MAT will also have an adverse impact on the telcos paying the same during the exemption period, a cost which could be passed on to subscribers in terms of higher tariffs.

Rajat Sharma, Industry Analyst, Frost & Sullivan
The budget is very sombre on the telecom front. Telecom is one the fastest growing industries in India. Budgets over the years have met many of the requirements of the telecom industry, such as the increase in FDI limit and various customs duty exemptions. The only issues that now remain are related to taxation. These issues have unfortunately not been addressed. Instead, the increase in service tax by 2 per cent has added to the woes of dropping ARPUs for operators. Tax-related issues need to be looked into very seriously in the future to maintain the high growth rates.

However, the brighter side of the budget is the provisioning of Rs 15 billion from the USO Fund, from which private operators can hope to derive some benefits.