The Indian telecom market, led by the robust growth in mobile subscriber base, is one of the fastest growing in the world adding over 1.5 m mobile subscribers a month. Reduction in tariffs and cost of handsets, which essentially makes the service very affordable for the user, has supplemented the growth of the Indian telecom sector.

The pro-business and pro-market policies (with gradually reducing regulations) are resulting into increased competition amongst existing players. This has also provided opportunities for many new market entrants and applications (like broadband services, Internet protocol virtual private network (IP VPN), wireless communications and security technologies).

Budget Measures Estimated outlay for Jawaharlal Nehru National Urban Renewal Mission to be Rs 62.5 bn during 2006-07, including a grant component of Rs 45.9 bn. Through this mission, the government intends to promote establishment of new towns, preferably focused on a specific industry (IT) or a specific theme (education or health). Telecommunication to reach 250 m connections by December 2007. Provision of Rs 15 bn for Universal Services Obligation Fund in 2006-07 More than 50 m rural connections to be rolled out in the next three years. Peak rate of customs duty on non-agricultural products has been reduced from 15% to12.5% with a few exceptions. The rate of service tax is being raised from 10% to 12%.  Budget Impact Establishment of new towns through the urban renewal mission is a positive for the telecom sector, given that this shall aid a faster growth in teledensity. Provision of Rs 15 bn for Universal Services Obligation Fund towards network expansion shall also foster the government's target of reaching 250 m subscribers by December 2007.  Sector Outlook We believe that the Indian economy is on its way to becoming an IT and telecommunications superpower. National income is rising and the government's commitment to develop the country into a premier technology hub in the region needs to be given some weight. Gradually reducing regulations are resulting into increased competition amongst existing players. This has also provided opportunities for many new market entrants and applications (like broadband services, Internet protocol virtual private network (IP VPN), wireless communications and security technologies). Also, reduction in tariffs and cost of handsets, which essentially makes the service very affordable for the user, is likely to supplement the growth of the Indian telecom sector in the future.  Industry Wish List Wish list (Cellular Operators' Association of India) Telecom service providers (TSPs) should be made eligible to avail credit of 4% average customs duty on ITA (Information Technology Agreement) bound items like mobile handsets. This move shall reduce costs of services and make telecom services more affordable and enable a faster rollout. Service tax charged by mobile operators should be allowed at credit to all who are covered by the Service Tax Act. Distributors and channel partners of TSPs should also be exempted from registration of Service Tax. The period during which tax deduction under Section 80IA can be claimed by telecom operators should be extended to 20 years from the existing 15 years, including 100% exemption for successive 10 years out of the 20 years TDS should not be applicable on interconnect charges paid by TSPs. Application of Minimum Alternate Tax (MAT) under Section 115JA. Accelerated depreciation for the industry. Definition of AGR (adjusted gross revenues) should be based solely on service related revenues and all non-service related revenue streams (interest income, dividend income etc.) should be excluded.  Budget over the years Budget 2003-04 Budget 2004-05 Budget 2005-06 Foreign direct investment limit on telecom companies raised to 74% from 49% earlier. Reduction in customs duty on capital goods for the telecom sector from 25% to 15%. Continuation in tax holiday for infrastructure related sectors. Customs duty on optical fibre cable reduced from 25% to 20% FDI limit in the sector increased to 74% from 49%. Customs duty exemption on mobile switching centers imported by telecom service providers now extended to universal access service providers. Service tax increased to 10% from 8%. 2% education cess on direct and indirect tax. Bharat Nirman Project to give telephone connectivity to the remaining 66,822 villages through BSNL. A provision of Rs 12 bn for USO Fund in FY06 for telecom. Mobile telephone removed from the 1/6 criterion for filing income-tax returns. Custom duty on copper reduced from 15% to 10%. Custom duty and CVD exemption on parts, components and accessories of mobile handsets including cellular phones continued. Customs duty exemption for specified telecom network equipment and parts thereof, if imported by TSPs, extended beyond March 2005 without any specified time limit. Custom duty on optical fibres and optical fibre cables reduced from 20% to 10%. [Read more on Budget 2003-04] [Read more on Budget 2004-05] [Read more on Budget 2005-06]
Key Positives Connecting India: The telecom sector has been one of the fastest growing sectors in the Indian economy in the last 4 years. This has been witnessed due to strong competition that has brought down tariffs as well as simplification of policy environment that has promoted healthy competition among various players. Due to this reason, telecom density in the country has risen to over 12.0% at the end of January 2006, from 3.6% in March 2001. It's ringing mobile: The mobile sector alone has been growing rapidly and has emerged as the fastest growing market in the whole worlds. Currently of a size nearing 70 m (GSM and CDMA), this sector is expected to reach a size of nearly 200 m subscribers by FY08. Consolidation picking up: The government has eased the rules regarding inter circle and intra circle mergers. This has led to a slew of mergers and acquisitions in the recent past. Also as the sector is moving closer to maturity, further consolidation is a reality and this will lead to the survival of more profitable players in this segment. Broadband push: In order to further promote the use of Internet in the country the government is taking proactive steps to develop this sector with the help of the various players in this segment. For this purpose, the use of broadband technology is being mooted and this will go a long way in improving the productivity of the Indian economy as well as turn out to be the next big opportunity for telecom companies after the mobile communications segment.		Key Negatives Highly taxed sector: The COAI (Cellular Operators Association of India) has indicated that the telecom sector, especially the cellular services segment, continues to pay very high duties and levies. The association has also indicated that due to the high rates of duties and levies and falling ARPUs, cellular service providers are not in a position to fund expansion and enter in to the relatively lesser-serviced rural areas. Currently, the sector is paying duties and levies under various heads including annual license fees, spectrum charges and access deficit charge (this has been partly reduces off late). In addition to the above, significant levies are also imposed on the industry on account of sales tax, service tax and import duties on handsets and other telecom hardware. As a matter of fact, a report from TRAI states that the burden on the sector on account of access deficit charge, spectrum charges and license fees is to the tune of 25%. This excludes the burden of sales tax and the effects of other levies like service tax and import duties.

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