Various licensees are investing huge amounts in building their networks                                                         

Current industry status

The Indian Telecom industry has made rapid progress since New Telecom Policy - 1999 (NTP '99).

Cellular Industry has witnessed a rapid growth in the last five years. The number of cellular subscribers crossed the 1-crore mark for the first time in December 2002. As at 31 December 2002, the total all-India cellular subscriber base was 1,04,80,430, up by 91% y-o-y.

In the basic operations, India has the sixth-largest fixed services telephone network in the world, with an estimated 40.2 million fixed lines at end-2002.

However, the tele-density remains low for India. As of end-2002, telephone penetration (per 100 inhabitants) was 3.8 fixed line connections and 1 cellular subscriptions. By comparison, global telephone penetration per 100 inhabitants at end-2001 was estimated at 17.2 fixed subscribers and 17 cellular subscribers.

In the last year's Budget, the Government addressed some of the concerns regarding anomalies in the Customs Duty Structure. This has helped reduce costs of imports, which in turn had a positive impact on network rollout. This has led to expansion in services in different service areas and an increasing subscriber base.

 It is opportune that this be further rationalised to achieve the desired policy objectives of affordable world-class services through increased competition. In the near future, we would witness the launch of (basic as well as mobile) services in some more circles, which have been licensed after NTP '99, which would help in raising teledensity.

While network rollouts continue at a hectic pace, it is imperative that the costs are reduced and efforts be directed to keep these at minimal levels.

In the Internet space, the liberal and non-exclusive licensing of Internet services has resulted in availability of Internet services across the breadth and length of the country. Though the number of subscribers has grown almost 20-fold in the past 4 years, challenges lie ahead in achieving the target of 23 million subscribers of Internet during the ongoing 10th Five Year Plan. Currently, there are 400 plus valid ISP licensees, out of which around 180 plus are operational.

There are more than 35 lakh dial up subscribers and more than 5,000 leased line subscribers. The total number of Internet users crossed the 2 crore mark with more than 400 cities being covered by Internet. The total investment in this area has been around Rs 6,000 crore and the total accumulated losses to the tune of Rs 1,800 crore.

The Internet Service Providers Association of India (ISPAI) has noted that the fresh investment required during the Tenth Five Year Plan would be close to Rs 20,000 crore.

In the VSAT Services, investment in VSAT services was allowed by the private sector under National Telecom Policy 1994 (NTP) in August 1994. The License Agreement signed by VSAT service providers with DoT also defines the VSAT services as an enhanced telecommunication service.

In FY 2002-03, the revenues of the telecom cables' industry are expected to decline by around 40%, to Rs 27.9 billion. The decline in revenues will be driven by a significant decline in the offtake of jelly-filled telecom cables (JFTC) by BSNL, coupled with a decline in the prices of JFTC and optical fibre cables (OFC).

In FY 2002-03, the offtake of JFTC is estimated to decline by 33%, to around 365 lakh core kilometers (ckm), mainly due to a substantial decline in the offtake of JFTC by BSNL.

On the other hand, in FY 2002-03, the demand for OFC is expected to increase at a lower rate of 11.4%, to around 2.5 million fibre kilometers (fkm), as compared with a very high growth of over 100% in FY 2001-02.

The significant decline in the demand growth of OFC is due to the high levels of stock with BSNL. BSNL and MTNL are estimated to account for around 55% of the total offtake of OFC. With a substantial decline in the offtake of JFTC and a higher decline in the prices of JFTC and OFC, the telecom cable producers are likely to report operating losses in FY03.

Prevailing tax rates and provisions

Cellular Operations (COAI):

Excise Duty issue: Excise department is trying to include installation of tower under manufacture term. Notices have been issued by Central Excise Dept. to Cellular Operators for paying Excise Duty on Transmission tower for Radio Telephony. (TTRT) i.e. on tower installed on various sites.

Exemption under Sec 10 (23G):

Benefits of section 10 (23 G) will be available to all the cellular operators on the condition that such infrastructure facility is approved by the Central Government. For getting the approval, a company needs to apply with Ministry of Finance. Along with the application they need to attach various certificates, affidavits, verification (no due certificate) from Commissioner of I. Tax etc. As the process involves various administrative formalities, in most of the cases it takes approx. 1 to 1-1/2 years in getting the certificate and validity of this certificate is only three years.

Also, FIs (IDBI, ICICI etc) get a tax benefit on their Net Income (difference between gross income earned and cost of funds) when they lend to infrastructure sector through exemption under Section 10 (23 G) of the Income Tax Act. Since exemption is limited to Net Income, little incentive for FIs to reduce interest rates - resulting in high cost of debt for infrastructure projects including telecom.

Tax Holiday under 80- IA:

Under existing provision, to avail this exemption services should commence before 1 April 2003.

Cellular Services still in 1/6 scheme of Income Tax:
In the budget 2002-03, basic telephone services and WLL telephony services were excluded out of compulsory filing of Income Tax return. However only cellular services were not excluded. i.e. If a person is a subscriber to a cellular telephone (not being a wireless in local loop), he is required to furnish a return of income.

Telecom Equipment Manufacturers:

Presently, customs duty on Telecom equipment (like Telecom power plant, Line telephony equipment, transmission equipment and cables) attract 15% customs duty. On the other hand, the main telecom equipment parts attract customs duty ranging between 5-25%.

Present total duty on Cellular Handset is @ 14.4 %. High cost of a handset is also an entry barrier for potential cellular mobile subscribers in urban, semi-urban and rural areas. As on date the smuggled handsets have cornered close to 60-65% of the current market share, but make 'zero' contribution to the Government coffers. Smuggled handsets are available at approx. 70-75% of the cost of genuine imports, as they did not pay the import duty or local taxes and octroi etc.

Present Total Duty on Infrastructure for telecom Industry is 21.80%, including 5% basic and 16% CVD.

ISPs:

Numerous public Internet kiosks and sanchar dhabas are making affordable and ubiquitous Internet access possible for the masses just what PCOs did for telephony earlier. ISPs have invested a lot in all the three layers of network (viz. the access or the last mile, the domestic backbone and the international gateways) as well as in systems for customer care, content development and hosting. It is well known that Internet Industry in India is in nascent stage and ISPs are yet to recover accumulated losses. Even the present levels of revenue realisation are leading to losses and it will be quite some time before operations become profitable. At the same time, there is a need for continuous investments.

Thus, it is imperative that the total cost of usage for Internet be significantly brought down through appropriate policy direction and requisite modifications so that not only the operations of ISPs become viable but also the total cost of using Internet access by the masses. The latter can be done by measures resulting in direct reduction in the cost of Internet access device (VoIP devices, Set-top boxes and cable / DSL modems, radio equipment, etc.) as well as by making alternatives to dialup access by way of radio and DSL.

Industry expectations:

Total Duty on Infrastructure for telecom Industry should be brought down to zero from the current 21.80%.

Cellular Operators (COAI):

Excise Duty issue:

Excise Duty is already paid by the tower manufacture supplier and the operator only installs the tower for use of transmission of microwave.

It should be clarified that installation of Towers by Cellular companies does not fall within the ambit of word manufacture to put rest to the ambiguity existing right now and save time and effort of both sides.

Ultimately if Excise duty is imposed on the installation of tower when excise duty has already been paid on materials, this will affect the user directly as the cost of service will go up.

Exemption under Sec. 10 (23G):

Necessary clarifications should be issued to enable all the cellular service providers to avail the benefits of Section 10 (23G) unconditionally with out any approval of the Government. This would clear any confusion regarding the interpretation of the section and would promote 10(23G) as a funding option thereby making it easier to raise infrastructure funds.

Also, if FIs be are given tax exemption on gross income instead of a net basis under Sec 10 (23 G), FIs can reduce lending rates by at least 200 basis points - leading to improved feasibility of infrastructure projects.

Tax Holiday under 80-IA:

For the new licences issued in 2001, this period should be extended by 2 years i.e. upto 1 April 2005. This would greatly enhance viability of cellular service projects. This would also go a long way in enabling companies to achieve financial closure.

Cellular Services to be out of 1/6 scheme of Income Tax:

Cellular phone services should also be excluded like WLL services, as the cost has fallen drastically, and it is affordable by persons even below taxable limits. Moreover the nature of service is same in both the cases. COAI feels that if cellular mobile phones are retained in the 1/6 criteria, then the Government will be consciously attaching a premium tag on the service and will be discouraging the use of this service by the common man.

Eligibility for minimum alternate tax (MAT):

Public telecom services should be covered under Section 115(J)A of the Income Tax Act,1961, which would give the telecom companies the status of infrastructure providers. This would enable the telecom service providers to be eligible for exemption from MAT.

Basic Operators (ABTO):

Private Basic Service Operators seek the Government's support in their initiatives to achieve the desired policy objectives through Customs Duty reduction and reduction in License Fee (Revenue Share) paid annually to a lower level of 6-7% (USO included). Both these measures would help Basic Operators attain viability. Besides, ABTO has also recommended some other Budget proposals.

Direct Taxes:

The tax holiday under Section 80(I) A of the Income Tax Act currently applies to companies starting basic services on or after the 1 April 1995, but on or before the 31 March 2003.

It is recommended that the benefit available through the above amendment be extended for a period of another one-year i.e. telecom companies commencing services before 31st March 2004, so that the tax holiday can be availed.

This gains significance since Basic Service Operators are likely to launch services in some circles only after the close of this financial year. Services in these circles, which would necessarily be the lesser revenue generating circles, would be launched after 31st March 2003.

If this benefit is not available, it would put higher constraints on the financial resources which could otherwise have been deployed for faster network development.

• Section 139 of the Income Tax Act, 1961 has been amended last year to provide that subscribers of basic telephone services are no longer covered by the one-by-six scheme (where they had to compulsorily file a return).

Rule 114B(g) of the Income Tax Rules, 1962 continues to be in force. This rule read together with the third proviso requires that a subscriber of a telephone to furnish Form 60 in the absence of a PAN / GIR No.

We continue to obtain Form 60 from our subscribers (those not having PAN / GIR No), resulting in unnecessary paper work and administrative difficulties. It is recommended that Rule 114B(h) and the third proviso be suitably amended to provide that subscribers to basic telephone services need not furnish Form 60.

• Customers of Basic Telecom Service Providers have been following the practice of deducting tax at source u/s 194C and 194J of the Income Tax Act, 1961. This is despite the fact that the Madras High Court has passed a judgment that no tax is deductible in respect of payments made to telecom service providers in respect of telecom services rendered by them.

This results in unnecessary administrative inconvenience to the basic telecom operators who have to manage mass volume of transactions and also because of their other business processes like late payment fees etc. are impacted by outstanding balance which arise because the customers delay the handing over of TDS certificates.

It is thus represented that a clarification be issued confirming that no tax should be deducted at source in respect of payments made to licensed telecom service providers and ISPs for telecom and internet services respectively provided by them pursuant to the licenses granted to them by the Government of India.

Indirect Taxes:

Customs:

• Modifications to customs duty clauses.
• Removal of basic duty for CDMA based mobile services (WLL) offered by basic providers.
• The Government can help reduce Capital Costs by implementing a zero duty regime for CDMA network infrastructure equipment required for Basic Services which will help in substantial cost reduction in network rollout.

CVD:

CVD of 16% on items not manufactured in India and which needs to be imported, results in unnecessarily higher costs and unduly burdens the service providers, especially since CENVAT is not available to the Services Sector. This CVD should be removed for items not being indigenously manufactured necessitating imports.

SAD:

Under the Customs Notification 118/2001 dt 13.11.2001 the SAD is exempt on all the items imported, by amending the notification 19/2001 dt.31.3.2001 vide entry no 35A, for the components and accessories of mobile handsets including cellular phones. Other service providers named Basic Service Providers, NLDO, Infrastructure Providers (IP-I and IP-II) should also be exempt from payment of SAD in order to have a level playing field.

VAT & Service Tax:

The Government of India and State Governments are considering the introduction of VAT in the forth coming Budget 2003-04. In this situation the Service Tax imposed on telecom sector should suitably be replaced with VAT otherwise this sector has to incur huge Taxes by way of VAT on purchase of Capital equipments and 5% service Tax on its revenue which results in increased cost effective in providing the services. Telecom services should be included in the list of services covered by a composite value added tax covering both goods and services and the service tax presently imposed on telecom sector be withdrawn.

Deemed Exports:

At present, supplies by local manufacturers to industries like Power, Fertilizers and Refineries have been recognised by the Government as Deemed Exports.

Through this, the local suppliers get customs and excise duty benefits. It is therefore important that the government should also treat indigenous supplies to telecom infrastructure creators and service providers as Deemed Exports. There is no denying the fact that given the important role played by it, telecommunications services sector is also an integral part of the infrastructure sector.

While ensuring a level playing field for the indigenous manufacturers of telecom equipment, it also brings down the overall costs to service providers when sourcing equipment locally.

Special Focus to Rural Telephony Program:

ABTO requests the DoT to facilitate rural connectivity by taking up with the Ministry of Finance through a waiver of customs duty (i.e. ZERO Duty) on all network infrastructure equipment deployed for rural connectivity.

As this equipment is being imported for meeting a national objective of connecting remote, rural areas across the country, there is no denying that this is purely for a social cause with no commercial gains for the Basic Service Operators.

Private Basic Operators along with BSNL are shouldering the responsibility of the Government by connecting all villages across the country, which are totally non-remunerative and unviable, leave aside any question of making profits.

Network equipment thus deployed in such rural / remote villages should be totally exempt from Customs Duty so that telephone access can be provided to all citizens of our country.

Thus reduced costs through customs duty waivers for deploying successful technologies through imported equipment not indigenously manufactured in India can help reduce the financial strains on the Basic Operators by reducing the network rollout costs. Basic Operators, for providing village public telephones (VPTs) have to incur prohibitive costs with very little returns not enough to cover these costs.

Equipment manufacturers:

As proposed by TEMA:

1. Customs: Inverted duty structure for the telecom products should be rectified. Custom duty on all inputs and components used for manufacture of telecom equipments should be reduced to Zero. And the items where ever they are in dual used, a certificate should be granted by DOT to the domestic telecom equipment manufacturers to enable them import those dual used inputs and components at Zero custom duty. TEMA suggests that the existing duty on import of finished

Telecom Equipments may continue at 15% level.

TEMA has also asked for a zero customs duty on imports of all raw materials used in the manufacture of JFTC and OFC. The TEMA has proposed that the basic customs duty on JFTC and OFC be maintained at the existing levels of 15%.

2. Customs Procedure: Introduce reforms in custom procedures and clearances such as self-certification and post audit, procedural (a-posteriori) controls in place of physical controls to reduce the period of clearance and thereby effective inventory control to manufacturing units.

3. Introduction of VAT: TEMA suggests merger of service tax and sales tax into VAT and the imports are also to be covered by VAT. In order to keep Telecom Manufacturing Sector viable, VAT should be introduced at the earliest so that we can be competitive vis-ą-vis imports. Furthermore, in order to avoid dual tax by way of service tax and sales tax, both the systems should be replaced by a single VAT system. This will encourage the private Service Providers in purchasing domestic equipment.

4. Government Policies: Technologies are changing fast in the Telecom Sector and it often becomes difficult to manufacture state-of-the-art equipments all the time, as it involves huge financial implications to upgrade the existing manufacturing base. To get cope up with the technological innovations and upgrade the existing manufacturing base a 10-year tax holiday is suggested which may be extended to the existing manufacturing units as well to the new units.

Use of domestically manufactured equipments and TEC approved products be made mandatory in the national network as well as in the private service providers. All the service providers may be given a benefit of deducting 1/3rd of the cost of using indigenously manufactured telecom equipment from the gross adjusted revenue for the purpose of levying revenue sharing charges.

All institutions under Government, State Governments be asked to use domestically manufactured telecom equipments if it meets their functional requirements and not to insist upon any foreign body certification other than Telecom Engineering Centre or an Indian Certification body.

As Proposed by TISA:

• Currently it is important that the volume of subscribers for mobile handsets be it CDMA or GSM substantially has to grow up, so that by 2005 indigenous manufacturing of handsets becomes economically viable. It is therefore proposed that Custom Duty on mobile handsets of all type be reduced to 5% or 0% depending upon the rationalization policy being followed by government.
• In order to justify indigenous manufacturing of professional telecommunication products such as telecom power supplies, repeaters, infrastructure equipment for GSM/CDMA network, switches, the countervailing duty (CVD) on imports of such products should continue. IT should not be withdrawn so that imports are not promoted particularly from countries, which are dumping their goods into India.
• For all supplies by indigenous manufactures to green-field telecom projects, such supplies may be given the status of deemed exports. The green-field projects to be included all the following; service networks be it for basic services, cellular services, radio trunking services, payphone services etc. for the areas where such services do not exist now and the goods being purchased from domestic vendors become an intrinsic part of the network. The goods may involve switching, transmission, external plants as well as subscriber equipment.
• Such provisions are not part of the existing modified EHTP scheme and are not covered by any existing scheme.
• India is the destination for software development activities and today hardware designs in telecommunication application is increasingly incorporating software content and as predicted by 2005, the ratio of hardware to software content in telecommunication products will be almost 50:50. To encourage MNC's to invest in software development in India for the hardware products incentives may be provided so that they establish their international software development centres in India. An important incentive would be to allow for calculation of Income Tax allowing 200% weightage for all software development expenses they incur provided such software is also sold domestically by the MNC's with whatever equipment they may be selling to domestic parties. There are many countries that allow 100% weightage but by giving 200%, India will create very favourable atmosphere for MNC's to consider India as the destination for Telecom Software development.
• Creation of Telecom Finance Corporation. As proposed by TISA, the TFC be established along lines of Power Finance Corporation with a corpus of approx. Rs 50 crore of capital and accordingly a provision in the budget may be made to allot the same money as a first time exercises.
• Creation of a corpus for National Telecom Research and Standardisation Centre. Such a centre should serve both industries as well as the public sector. It may be managed by autonomous body and all shareholders who would be the major industries. Centre should be responsible for future technology planning as well as removing existing technology aberrations, if any, in Indian networks.

ISPs:

• Under the Exemption in Custom Tariff Schedule, the List 22 should be revised so as to include additional equipment as enlisted in the Appendix as also extension of the concessional rate applicable on the goods enlisted thereunder - for at least another 2 years.
• The basic customs duty applicable on the CPE (Customer Premises Equipment) like VoIP device, modems, DSL modem, cable modem, set-top boxes, Wireless LAN equipment and the customer-end Radio Communication Equipment should be brought down to a level not exceeding 5%.
• Sub-section (2) under Section 3 of the 'Service Tax Credit Rules, 2002' notified vide no. 14/2002-SERVICE TAX should be modified suitably, such that the taxable services defined in sub-clauses (zh) and (zd) & (ze) of clause 90 of section 65 of the Act shall be deemed to be falling within the same category.

VSAI:

• As per NTP 99, the telecommunication services have already been classified to include the VSAT services. In the interest of clarity and by way of confirmation, which would avoid potential confusion in the future, we request that an official clarification be provided to indicate that VSAT services are included in the above notification.
• Since VSAT services and all other services were permitted under NTP 1994 with effect from 1st August 1994, Section 80-IA (ii) as modified by Finance Act 2001, should be amended to read the starting date of services as 1st August 1994.
• Currently, the customers have the choice to import the goods or buy from any importer independently. As such, the concessions should be extended to the persons importing goods for selling to the users for deploying in the network licensed by the Department of Telecommunications of the Government of India for the purpose of providing value added services via VSAT. Hence, the VSAI has suggested an amendment to the current notification so that the equipment can be imported by a licensed VSAT Se Service provider or by a System Integrator / Contractor for deploying in service the network licensed by the Department of Telecommunications of the Government of India for the purpose of providing value added services via V- SAT.
• Equipment which are subsystems of a VSAT terminal are described as Satellite Communication Equipment and are classified under CHT 85252011.90(others); wherein the policy states that these are restricted and require a WPC license for clearance. On the other hand the VSAT terminal as a complete unit is classified under CHT 85252011.10. Import of equipment under this clause i.e. in this case of the complete VSAT terminal does not require a WPC license.

There is no vendor in the market which manufactures / supplies a complete VSAT terminal i.e. all the sub-systems. This means that either all or some of the sub-systems have to be imported under CHT 85252011.90. VSAT terminal is always purchased / paid for by the VSAT user. The user has the r right ight to purchase this equipment from any source / sources as long as it is compatible to the equipment used at the VSAT hub of the service provider.

Because such import falls under CHT 85252011.90, the user is required to have a WPC license. Basically the lack of clarity as to what all comprises a VSAT terminal has created unnecessary and avoidable delays in the customs.

A clarification / amendment is suggested that since a VSAT terminal comprises of different equipment supplied by different vendors vendors, such equipment which comprise a VSAT terminal be classified under CTH 85252011.10.

Analyst expectations: In view of the extremely low telephone penetration, a reduction in costs (and prices) is likely to make telephone services more affordable and improve telephone penetration. Reduction of customs duties on major imported equipments will likely reduce capital costs. The reductions in customs duties and abolishment of 10% surcharge on customs duties in the Union Budget for FY2002 had resulted in reduced equipment costs.

Although effective customs duties on cellular phones have been reduced in previous budgets, there still exists a wide differential between the price of an imported cellular phone and a cellular phone purchased from the grey market. Although, cellular phone prices are declining steadily, a reduction in effective import duties will lead to further price declines and make a cellular subscription more affordable.

Customs duties, excise duties and sales taxes could be rationalised so as to make indigenous manufacturing of telecommunications equipment viable as compared with imports.

In case of FDI limit of 49%, analysts expect this limit to be increased to 74% in line with the Kelkar Committee recommendations. This would be a big positive for the Telecom sector.

Best Pre-budget Buys/Sells: Bharti Tele-Ventures is an integrated telecom company and needs a closer look. Also, MTNL can attract attention if the Government takes any firm stand on the divestment issue, especially in case of MTNL.

Summary: Total telephone connections are expected to increase to an estimated 55 million at end-March 2003 from 44.2 million at end-March 2002. Fixed line installations increased at 17.3% during FY 2001-02 to 38.3 million at end-March 2002, and are expected to increase 12% during FY 2002-03 to around 42.5 million by end-March 2003. Cellular subscriptions increased 79.8% during FY 2001-02 to 6.4 million at end-March 2002, and are expected to increase 90% during FY 2002-03 to an estimated 12.2 million by end-March 2003.

Additional cellular subscriptions are expected to account for 58% of additional telephone connections during FY 2002-03, as compared with 33% during FY 2001-02. Cellular subscriptions are expected to account for 22.6% of telephone connections at end-March 2003, as compared with 14.4% at end-March 2002.

Sustained growth of Telecom Sector is critical for overall economic growth of the Country. Telecom Sector has to invest Rs 1,67,000 crore during the 10th Five Year Plan so as to meet the tele-density target of 10 per 100 people of the NTP '99. The opportunity cost associated with not having modern telecommunications facilities is several times the revenue mobilised by the levying of high import duties on telecom infrastructure.

Various licensees are investing huge amounts in building their networks, which will provide the backbone infrastructure for development of the country. All these investments will provide a major boost to the (FDI) economic activity in the country. It is therefore essential that these networks are not loaded with additional costs in terms of duties.

In case of ISPs, Public finance policy plays a very important role for the sustainable growth of any sector. This is especially true in the case of Internet where the government is exploring all possibilities to introduce citizen-interface through scalable and standardised e-government applications at all levels - central, state and local.

The potential for Internet usage is immense with the ongoing developmental initiatives like Indian language application and translation application and focus on content development that is local in context and is hosted within the country.

With the commencement of operations by various Certifying Authorities licensed under the Information Technology Act, 2000, e-commerce in the real sense is poised to take off, giving further fillip for Internet services.

Run-up to the Budget 2003

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