Telecom Industry: Calls For A Strong Regulatory Foothold

Once slated to emerge as the prime engine of the Indian economic growth story, the telecom industry over the past one year has suffered badly on a number of counts. Plagued by an array of concerns, ranging from the infamous 2G scam which resulted in the cancellation of 122 licenses to the ballooning 3G spectrum debt to the slower-than-expected traction in 3G services and finally the macro concerns of high cost of borrowings, the telecom industry has received a major setback and its future prospects look very gloomy.

The key performance indicators like Rate Per Minute (RPM) and Average Revenue Per User (ARPU) have seen a drastic fall over the past couple of quarters for major telecom players like Bharti Airtel, Idea, RCom and Vodafone. While subscriber additions can be termed as one of the reasons for the declining trend in ARPUs, it has been noted that the past momentum in subscriber additions has also taken a beating as telcos have lowered their capex plans considerably.

On the bourses, since the announcement of the last budget, all the three listed telecom players – Bharti Airtel, Idea Cellular and RCom have managed to post positive returns. While RCom and Bharti posted a modest 12 per cent and 2 per cent returns respectively, Idea gave a hefty 67 per cent returns over the past one year.

Budget 2011-12

The impact of last year’s budget was neutral for the Indian telecom industry. The government had marginally increased the Minimum Alternate Tax (MAT) from 18 per cent to 18.5 per cent but at the same time reduced the surcharge levied from 7.5 per cent to 5 per cent, which somewhat nullified the effect. The exemption from basic countervailing duty (CVD) and special additional duty (SAD) on components and accessories of mobile handsets were extended in the current financial year and a few others were too added under its ambit. This extension of duty exemptions helped in sustaining the current low prices of mobile handsets.

Expectations From Budget 2012-13

Like every other year and every other sector, the expectations from the Union Budget 2012-13 on behalf of the telecom sector is to see the creation of some concrete provisions which would help spur growth in the sector. The need of the hour also calls for a strong regulatory foothold which could help nurse the various issues that have been left neglected for the past couple of years and led to stagnancy in the telecom industry. Some of the recommendations made by prominent industry bodies and individuals are:

• The Federation of Indian Chambers of Commerce and Industry (FICCI) has recommended that the government should bring out specific amendments in the Income Tax Act to clarify that the 3G spectrum fee payments qualify as intangible asset”. The government should also bring out a specific amendment to provide for capitalisation of interest cost incurred on capital borrowings for the purpose of acquisition of 3G spectrum or on settlement of foreign currency loan used to acquire assets in India.
• The FICCI also calls for the government to classify telecom under infrastructure category as it will boost significant foreign investment in this sector which is highly capital intensive.
• The Telecom Equipment Manufacturers Association (TEMA) has seconded FICCI’s call for bestowing the telecom sector with infrastructure status by adding that an infra status would benefit telecom infrastructure companies to acquire long-term benefits from entities such as India Infrastructure Fund which in turn can ease the availability of funds.
• To further accelerate growth of the telecom sector and to ensure an affordable tariff to consumers, TEMA has recommended the need to re-examine the multiple taxes and levies applicable to the sector. As per them, there should be deferment of excise and VAT for the minimum period of five years for all the Indian product companies and preferential market access should be mandated for the Indian products.
• TEMA also believes that accelerating the growth of broadband across the country should be a priority of the government. By abolishing service tax on internet/broadband services it would make such services affordable to masses, particularly in rural and remote areas. It would also help to bring down the cost of such services to the end users.
• Pradeep Jain, MD, Karbonn Mobiles has suggested that the government should cut taxes on mobile phone brands of Indian origin to help them compete well with the international competition.
• He also seeks for tax cuts on the import of raw materials which will help in reducing the production costs of hand held devices. As an impetus to the Indian mobile makers, he finally wishes that the government pitches in with rebates for setting up of indigenous plants which will help the Indian mobile manufacturers in bringing out more value for money products to empower the telecom boom in the country.

Conclusion

Apart from the above expectations made by some prominent industry bodies and individuals we at DSIJ believe that the government should also chalk out a concrete plan with regards to the spectrum allocation for 4G services and also the re-allocation of the cancelled 2G spectrums. The finance minister during his budget speech must provide clarity on the likely dates of spectrum auctions and also on the amount that the government is looking to raise from these auctions. This would not only benefit the incumbent players in the industry but also help the government to fill its coffers.