Download Nett incidence of License Fee, Spectrum Charges & Service Tax

Presentation to
Department of Telecommunications
Pre-Budget Recommendations
Association of Unified Telecom Service Providers of India
29 December, 2005 : New Delhi
1
Telecommunication
 Growth potential in the telecom sector is enormous.
 Only 30% population presently covered.
 Employment generation.
 Revenue generation for the government.
 Contribution to GDP
 Teledensity closely co-relate with GDP growth.
 In India, rapid increase in telecom infrastructure has multiple benefit –US
dollar 1 investment in telecom leads to increase in US dollar 6 in GDP
[source: World bank]
 10% increase in teledensity correspond to 0.2% - 0.6% increase in GDP
[Source: Vodafone]
Cont’d….
2
Telecommunication
 Rural Development
 Economic benefits of mobile telephony leading the growth
According to a recent study conducted by an international agency,
Ovum on “The Economic benefits of mobile service in India”, the Indian
Mobile industry is a major contributor to the social and economic growth
of the country, in terms of employment generation, government
revenues, GDP growth, rural development, etc.
Cont’d….
3
Telecommunication
The world is moving towards convergence mode
because of the tremendous potential of the ICT and
the impact it has on every other sector. Planned
development and use of ICT hold the key to faster
growth and give the country a competitive edge in the
globalised economy.
[Source: Mid term appraisal of 10th plan, Planning Commission]
Cont’d….
4
Telecommunication
 Access to telecommunication is key to development and growth and
provide new and exciting opportunity to those who have access to
them.
 Communication technology supports reduction of poverty by:
 Increasing the efficiency of the economy
 Enabling better delivery of public service (health & education)
 Creating new source of income
 Creating employment and training to poor population.
 Technology innovation making communication technology
affordable and opportunity to bridge the digital divide.
very
Cont’d….
5
Telecommunication
quote
Given this growth target, India has the potential to surpass China’s mobile growth in terms of
subscriber. This however, needs suitable strategies and policies. [source : Strategy Paper on
Telecom, MoF]
unquote
Quote
The importance of telecommunications to the economic growth of the country has been
highlighted by various studies as they consider that a strong link exists between telecom
penetration and GDP growth and productivity of a country. Use of telephones and other
information and communication technologies can result in substantial improvement in the
level of household and business incomes. This fact has also been emphasized by the
government as can be seen from its goals in the Common Minimum Programme (CMP), key
among which is the promotion of e-governance on a massive scale, which will enable the
common man to access government services in an efficient, convenient and cost effective
manner. [source : Strategy Paper on Telecom, MoF]
Unquote
6
Revenue Share License Fee
Why Revenue Share License Fee
for Telecom?
Cont’d….
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Reduction in Revenue Share License Fee
• Unprecedented growth of telecom sector resulted in exceeding target
of NTP 99 much ahead of stipulated time.
• This growth has been facilitated due to reduction of license fee after
migration to revenue share regime.
• MOF has stated that:
Quote
A reduction in the absolute amount of these duties and levies shall allow telecom service providers to
plough-back profits into enhancement of network and services. It is interesting to note that even with a
reduction in the license fee chargeable from telecom service providers, the government can continue to
collect the same revenue. This is so, because license fee is payable by telecom service provides as a
fixed percentage of their revenue. With steadily rising revenues in the telecom industry, the absolute
amount collected by the government will remain constant even if the percentage revenue share payable is
reduced in a given proportion.
[Source : Strategy Paper of MoF]
Unquote
Cont’d….
8
Reduction in Revenue Share License Fee
•
•
Internationally, telecom services attract much lower levies than that of India
India has one of the highest tax regimens in the World, and levies must be reduced to bring them in line with
International best practices
Pakistan
Sri Lanka
China
India
Regulatory charges
% age of revenue
%age
% age of revenue
% age of revenue
Service tax, GST
GST
VAT
3%
10% + GST
License Fee
0.5% + 0.5% R & D
0.3% turnover (t.o.) + 1% of
capital invested (inv)
Nil
5 – 10%
Spectrum Charge
Cost recovery
~1.1% to t..o
~0.5%* (China
Mobile)
2 ~ 6%**
USO
1.5%
Nil (only on ISD calls)
Nil
Incl in license fees
Total Regulatory
charges
2.5% +GST+ cost
recovery
1.3% t.o.+1% inv+VAT
0.5%+3% (Tax)
17%~26% + GST
* Backbone spectrum charges extra **Est. from Spectrum fees & revenue of China Mobile (Source: TRAI)
• High percentage of revenue share to be brought down to 6% including levy for USO fund
• High service tax of 10.2% to be brought down (already 1/3 of the total collection of service tax is estimated to be
from telecom services)
• With growth of 3 to 4 million subscribers per month the additional revenues will in any event compensate for reduced
taxes and levies
Cont’d….
9
Reduction in Revenue Share License Fee
• Reduction in revenue share license fee would not affect government revenue
as with increase of subscriber base, government revenue also increases
substantially.
Rs in Crores
ESTIMATE OF GOVT. LEVIES FROM LICENSE FEE, SPECTRUM FEE &SERVICE TAX ON ALL TELECOM
SERVICES
Year
Gross
Revenue
AGR
License fee
Service tax *
5-10%
Spectrum
Charge 2-4%
Total Govt.
Levies
2002-03
48000
40800
4080
2040
206
6326
2003-04
61000
51850
4770
4148
434
9353
2004-05
80000
68000
6256
6800
856
13912
2005-06
100000
85000
7820
8500
1530
17850
2006-07
139000
118150
10869.8
11815
2458
25142
2007-08
169000
143650
13215.8
14365
3275
30856
[Source: TRAI]
* Rate of service tax taken as 5% upto 13.5.2003, 8% upto 31.3.2005 and 10%
thereafter.
Cont’d….
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Reduction in Revenue Share
License Fee
In line with recent government decision of
reduction in revenue share license fee for
long distance services, there should be
uniform reduction in license fee to 6%
including USO levy for UASLs.
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Adjusted Gross Revenue (AGR)
 Accurate definition of AGR to avoid issues like double taxation,
unrelated activities
 AGR defined by DoT should exclude income from unrelated activities
such as :
 Interest income from investment
 Dividend income from investment
 Revenue from sale of handsets
 Sale of other assets
 Revenue from sale of capital goods
 Revenue from sharing of leased infrastructure
 If the above items are not included in the calculation of AGR, results in
lower incidence of license fee and consequent benefit to consumers
Source : Strategy Paper, MoF
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Adjusted Gross Revenue (AGR)
STRATEGIES AND POLICIES AS PER MOF STRATEGY PAPER ON TELECOM
 Revenues not related to telecom should be excluded from AGR.
 Any interest earned on invested fund should not be included in the AGR for the
following:

Operators being infrastructure companies require cash margins to get BG.

Infrastructure loan require debt service reserve accounts for making payments of
short term installments. Funds kept in such accounts earn interest.

Infrastructure project including telecom project get disbursements from FIs/banks on
the basis of expenditure and interest is earned on disbursement for shorter period.

Huge amounts received under IPOs also earn interest till those funds are deployed.

Rate of return on such investments is much lower than the cost of borrowed funds.

Interest and dividend income should not be included in the AGR. In case it is
considered as an income, then a set-off against interest payments on such borrowed
funds, should be allowed.
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Adjusted Gross Revenue (AGR)
STRATEGIES AND POLICIES AS PER MOF STRATEGY PAPER ON TELECOM
 Any receipt from sale of handset, accessories etc should not be included in the AGR as the
licensee himself purchases these items which are sold either at the same price or by adding
a small mark up.
 Receipts from sale of capital goods are miscellaneous income not derived from the
provision of telecom services. No revenue share should be payable on this amount in the
form of license fee.
 Inclusion of bad debts in the AGR amounts double burden on the company since the
company has been unable to recover the amount from its subscriber and in addition it
required to pay a license fee from such unrealized amount. If revenue has not been
collected, licensee should not suffer incremental cost of license fee on bad debts.
 As waivers and discounts given to subscribers do not actually accrue as revenue to the
licensee, the operators should be allowed to “net off” such charges against revenue as
these are actually deducted from the revenue. The government recognizes trade discounts
given by a trader as an allowable reduction for the purpose levying sales tax, which is levied
on the amount actually collected after deducting the discount. In the same line, inclusion of
discount or waiver in AGR need to be examined.
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SINGLE TAXATION
 Telecom service faces multiple taxes and levies which are one of
the highest in the world.
 Total levies on the telecom sector are around 21% of the AGR
including license fee, service charge, spectrum charge etc.
 Customer pay atleast 30% of the actual telecommunication bill
directly or indirectly.
 The convoluted tax structure needs to be addressed urgently.
15
SINGLE TAXATION
FM promised in his Inaugural Address at the 77th FICCI Annual General
Meeting on 27th December, 2004 that he will address the complex taxation
structure presently existing in the Indian telecom sector and come out
with investor-friendly, industry-friendly simple tax structure in this budget
of 2006-07. Relevant extract of his speech is reproduced below:
Quote
“The second aspects which your President touched upon are four sectors which, while he may
have referred to them in one context, are extremely important to me in another context. These are –
textiles, petroleum, sugar and telecom. Now, what is common among these four? In my humble view,
what is common among these four sectors is a convoluted tax structure that applies to these
sectors. From time to time, all of us have contributed to the convoluted tax structure. We have to
unravel this. We have to make this simple, investment friendly and industry-friendly. Last year, you
will recall, I made a beginning with one part of the textile sector, namely natural fibres. And I acknowledge
readily that it is an unfinished exercise, that there is another part of the textile sector, namely man-made
fibres, which requires attention. But to textile we must add petroleum, sugar and telecom as sectors
which have a very complex taxation structure. I promise that we will address this complex
taxation structure and come out with an investor-friendly, industry-friendly simple tax structure in
the next budget.”
Unquote
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Indirect Taxes
CUSTOM DUTY

CVD for imported Fixed Wireless Terminals should be nil (currently 16%) similar to Fixed Line telephones
and mobile phones. Currently there are nearly 8 million fixed wireless terminals. Growth per month is 3
lakh terminals approximately.

Microwave equipment – Custom duty for microwave equipment should be zero (currently
15%+(16%+2%)+2%) similar to Base Transceiver Station (BTS) under notification No. 7/2004CUSTOMS dt 8th January 2004.
EXCISE DUTY
Excise duty on locally manufactured equipment be at the lowest level of 8%.
SERVICE TAX

Be reduced to 5% or lower level from the present level of 10%

Restriction of 20% as provided in Rule 6 of CENVAT credit rules 2004 should be raised to 35% for
telecom sector.
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Special emphasis on growth of broadband
To achieve the targeted growth of broadband AUSPI suggests
the following :
- Allow 100% depreciation in the first year for PCs and CPE
including modems and routers.
- Reduce duties on inputs and finished products used in
broadband. Detailed list submitted to the Department.
- Central Excise Duty to be reduced.
- Waive entertainment tax on broadband subscription and
entertainment services.
- Waive Sales Tax on goods and services that are transacted
electronically.
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Direct Taxes
SECTION 80IA OF THE INCOME TAX ACT

The eligible period for the benefits be extended to 20 years from the current period of 15 years.
BENEFITS U/S 80IA(4)(ii)

Be extended upto 31-3-2008 (from 31-3-2005).
CONTINUANCE OF BENEFIT U/S 80-IA IN CASE SLUMP SALE
TDS ON REIMBURSEMENTS
TDS ON PAYMENTS COVERED BY 10 (23)G
SECTION 10 (23G) OF THE INCOME TAX ACT, 1961

Income from investments of infrastructure capital company and infrastructure capital fund.
SECTION 115JB OF INCOME TAX ACT

Exemption from MAT be extended to the telecom sector.
SECTION 115(O)

Tax on distributed profits of domestic companies with respect to companies availing tax holiday u/s 80IA should be exempted from tax.
RESTORATION BENEFIT U/S 80HHE

The benefits under above section discontinued from the assessment year 2005-06 be restored to its earlier level.
CLARIFICATION REGARDING TAX TREATMENT IN CASE OF AMALGAMATION & DEMERGER
INTERNATIONAL TAXATION ISSUES

Taxes on software and bandwidth payments – TDS provision should not apply on these payments.
CLARIFICATION WITH RESPECT TO INTERNATIONAL ROAMING AGREEMENT
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Thank you!
Contact us at
[email protected]
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