The telecom sector had a long wish list in terms of budget expectations: radical tax legislation reforms; clarifications on entry fees, one-time spectrum payments and revenue sharing; extension of the tax benefit to telecom infrastructure providers; and many more. However, most of these demands remained unfulfilled in the Union Budget 2015-16. Despite this, the government seems to be on a mission to bridge the digital divide in the country, as is evident from the budget’s focus on speeding up the Digital India drive.

The following are the key highlights of the budget and the likely impact on the telecom sector...

Plan outlay

Under the Union Budget 2015-16, the Department of Telecommunications’ (DoT) plan outlay has been set at Rs 52 billion. This includes Rs 5.2 billion for the north-eastern region, where the government wants to improve telecom connectivity. A sub-plan of Rs 130 million has also been earmarked for sub-tribal areas.

About Rs 24 billion has been earmarked for rural and remote telephony under the Universal Service Obligation Fund. The government also intends to improve the telecom network for the defence services with a planned outlay of Rs 21.5 billion. Meanwhile, in order to give an impetus to the local manufacturing of telecom products, the government has set aside Rs 500 million for reviving state-owned ITI Limited.

Short of expectations

Corporate tax has been decreased from 30 per cent to 25 per cent with the removal of exemptions over the next four years. However, the Cellular Operators Association of India feels this will result in only marginal benefits. The deferral of the GAAR (general anti-avoidance rule) provision by two years, and the abolition of the Direct Tax Code will also benefit the industry. But, at the same time, the increase in service tax from 12.36 per cent to 14 per cent is a negative move that will adversely affect consumers and make services more expensive.

Enabling provisions have been introduced for the levy of a Swachh Bharat cess, which will be treated as service tax. In case cenvat credit is not allowed, the suggested 2 per cent cess will increase the effective service tax rate to 16 per cent, which will be a huge cost for the telecom industry. The reduction in the rate of withholding tax on royalties and fees for technical services will ease the financial burden on the industry.

The goods and services tax (GST) will be rolled out by April 1, 2016. The industry’s chief concern – that the increase in the rate of tax from the current 12 per cent (service tax) to a higher rate under GST would increase the cost of telecom services – has not been addressed. The industry’s request for the compliance requirements under GST to be made uniform, user friendly and simple for stakeholders; this too has also remained unaddressed.

The excise/customs duty on mobile phones has been increased from 6 per cent to 12.5 per cent, which is likely to have a negative impact on the sale of smartphones.

Positives for manufacturing

The services industry has not benefited directly from the budget, but the government has announced several positives for domestic manufacturing and research and development of telecom equipment.

There has been a reduction in the basic customs duty on high density polyethylene, which is used in the manufacture of optical fibre cables, from 7.5 per cent to nil. In addition, all goods for use in the manufacture of Information Technology Agreement-bound items, except populated printed circuit boards, have been fully exempted from special additional duty. This duty has also been reduced on imports of certain other inputs and raw materials.

The budget has also proposed to increase the time limit for availing of cenvat credit on inputs and input services from six months to a year as a measure of business facilitation.

Digital India drive

Apart from these announcements, the finance minister stated that the government was making good progress in the Digital India drive. About Rs 25 billion has been set aside in the 2015-16 budget under the head “Digital India Programme and Telecommunications and Electronic Industries”. The minister also announced the setting up of a National Rural Internet and Technology Mission with an allocation of Rs 5 billion. This mission will impart IT training in villages, especially village schools, under the Digital India programme.

As per the Economic Survey of India 2014-15, optic fiber cable has been deployed in 5,000 villages so far under the National Optical Fibre Network (NOFN) project, and it is likely to be completed by December 31, 2016. The finance minister stated that the NOFN project was being speeded up further by allowing willing states to undertake its execution on the basis of cost reimbursements as determined by DoT. Andhra Pradesh has already opted to implement the NOFN project on its own and DoT will reimburse the cost.

Conclusion

While the budget has not given telecom players any direct benefits, the sector is set to derive overall gains. The positive economic outlook facilitated by enhanced investments in infrastructure, ease of doing business, the Make in India drive and the assurance of a more predictable tax environment by the finance minister in the budget will be a vital factor. The emphasis on the speedy implementation of the NOFN project to provide connectivity to all villages will also benefit the telecom sector and have a cascading impact on the economy.