The Indian telecom sector is facing several challenges related to spectrum allocation and charges, and regulatory uncertainty. Therefore, there were huge expectations from the Union Budget 2013-14 to revive its growth. However, the budget has failed to offer relief to the struggling industry.

Besides announcing zero customs duty on plant and machinery imports for the semiconductor industry, the budget does not provide any significant incentive for the telecom sector.

The following are the key relevant tax proposals made in the budget:

•The ad valorem excise duty on mobile handsets priced at over Rs 2,000 has been increased from 1 per cent to 6 per cent.

•The excise duty on mobile phones priced at Rs 2,000 or less has been retained at 1 per cent.

•Exemption has been provided to goods manufactured and captively consumed within the factory where final products are manufactured. In this respect, exemption is claimed under the 49/2003-CE and 50/2003-CE notifications, which are applicable in specified areas in Himachal Pradesh and Uttarakhand. The exemption is limited to goods listed in these notifications.

•A proposal has been made to provide appropriate incentives to semi-conductor wafer fab manufacturing facilities, including zero customs duty for plant and machinery.

In his budget speech, Finance Minister P. Chidambaram stated, “About 70 per cent of imported mobile phones and 60 per cent of locally manufactured handsets are priced at Rs 2,000 or below. These handsets enjoy a concessional excise duty of 1 per cent and I do not propose to change that in the case of low-priced mobile phones.”

However, the decision to increase the excise duty on mobile phones priced at over Rs 2,000 has not been a positive step for the industry as it will significantly impact the cost of mid-range and high-end smartphones. Moreover, smartphone sales will be affected by the value added tax that is already being levied on handsets in some states. According to T.M. Ramakrishnan, chief executive officer, devices, S Mobility, “The handset industry is facing a tough time given the growing competition and price wars. Though the demand for handsets will not witness a downward trend with the proposed tax increase, there will be an increased pressure on margins. This is expected to strengthen the industry’s focus on making smartphones more affordable.” Smartphone penetration will also be impacted in rural areas. The industry is also concerned that the increase in excise duty may strengthen the grey market business in the country.

The budget has provided a new incentive in the form of additional depreciation for new telecom equipment/handset manufacturing plants and machinery involving investments of over Rs 1 billion. However, the budget has failed to reverse the inverted tax structure, which has been impacting the industry for years by making India an import-dependent market.

Revenue expectations

As compared to the estimated non-tax revenues of Rs 582.17 billion in 2012-13, the telecom industry is expected to earn only about Rs 194.41 billion from spectrum sale and through associated charges. This can be attributed to lower collections from spectrum auctions (both the November 2012 and the March 2013 auctions).

The budget for 2013-14 expects revenues of Rs 408.47 billion from spectrum auctions and other communication services. According to the budget document, receipts under these services mainly include one-time spectrum charges levied as per the recommendations of the Telecom Regulatory Authority of India, and revenues from the auction of 1800 MHz, 900 MHz and 800 MHz spectrum. However, several industry experts say that this revenue target is unrealistic.

Mohammad Chowdhury, leader, telecom, PricewaterhouseCoopers India, says, “Of the total revenue expectation from the industry, at least Rs 200 billion can be expected from licence fees and the government could raise around Rs 100 billion from spectrum extensions and renewals. However, around Rs 100 billion of the government’s revenue objectives may be at risk.”

According to ratings agency ICRA, non-tax revenues for the telecom sector are expected to fall substantially short of the targeted Rs 400 billion.

While the budget did not focus on the telecom industry in particular, it is being considered investor friendly for all sectors. There has been an annual increase of about 30 per cent in the planned expenditure in the budget. It has proposed a 4.8 per cent fiscal deficit as compared to 5.2 per cent in 2012-13. Further, increased government support for industrial corridors will drive growth and encourage foreign investments during 2013-14. These factors will impact the demand for telecom services directly or indirectly.