Published Editorial

Budget 2013: Telecom sector seeks reforms and tax reliefs

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Economic Times


Rahul Kashikar
Associate Director - Tax & Regulatory Services

The Indian telecommunication industry, after witnessing an exponential growth over a decade, is experiencing change in tide. Rapidly changing market conditions and dynamics, declining fixed subscriber numbers, limited growth in mobile subscriber base, etc, are exerting pressure on the existing players to survive in its current form.

While explosion in data traffic has provided a new ray of hope for the industry, accumulation of additional capital to facilitate massive investment in capacity and backhaul to tap the unexplored potential in data services, has been a major concern for the industry. Provision of tax benefits including investment linked incentive would reinstate the investor's belief.

The Union Budget 2013-14 is being keenly awaited by the Indian businesses and foreign investors alike, largely to see whether the Finance Minister chalks out a credible path for the reforms process and provide an impetus to the telecommunication sector. Expectations from upcoming budget would include:

Retrospective amendment in royalty definition and Section 40(a)(i) disallowance:

The amendment in the meaning of the term 'process' under royalty definition by Finance Act, 2012 to include transmission by satellite, cable, optic fibre or similar technology, has had a far reaching impact on the industry. The amendment seeks to characterise almost all revenue streams of telecom operators, inter-alia, including roaming, interconnect, etc, as 'royalty' requiring tax withholding and that too retrospectively. This has severely impacted the cash flow position of operators who are already under pressure due to various developments on the policy front. Further, the potential disallowance of expenses u/s 40(a)(ia) of the Income tax Act, 1961 ('the Act') due to non-withholding of taxes would also additionally burden the operators.

Retrospectively amending and clarifying on provisions which relate to withholding taxes makes it almost impossible to comply for past years. Thus, applying the amendment with effect from 1 April 2012 for atleast withholding tax provisions, would come as a major relief to the sector.

Tax holiday benefits

Infrastructure status has been granted to telecom tower companies. This is likely to provide multiple benefits to the tower industry, inter-alia, including tax holiday under Section 80-IA of the Act. Consistent with the above, given the capital intensive nature of the industry and huge gestation period, such tax holiday benefits or investment linked incentive should be extended to all telecom players in the industry, including internet service companies which are still at its nascent stage. To this effect, the Government could appropriately amend the definition of infrastructure to cover 'telecom'.