Pre-budget expectations on telecom sector, Deloitte India

India is experiencing an elation of sorts around arrival of 5G and is proceeding leaps and bounds in the direction of new-age technologies and digital transformation. With one of the operator’s already having announced plans to build network infrastructure in-house, telcos are focussed on innovation/collaboration across the telecom value chain. For instance, a higher frequency 5G network demands smaller sites compared with dispersed macro sites in existing technologies. Therefore, 5G presents an opportunity for the country to design and develop robust/sustainable indigenous technology by investing in and incentivising its R&D capabilities.

Internet of Things (‘IoT’) is another imperative towards building a ‘smart India’. The number of connected IoT device is forecast to increase to ~25 billion at a CAGR of 10 percent between 2018 and 2025. 5G-enabled IoT devices have the potential to make a deep impact in smart cities and smart manufacturing. The National Digital Communications Policy of 2018 aims to increase the contribution of the digital communication sector to India’s GDP to 8 percent. At the same time, this policy aims for US$100 billion investment in the sector and broadband coverage at 50 mbps speed for every citizen.

While telcos will need to make massive capital outlay into fiberization, backhaul, network densification etc. to make 5G a reality, the concerns around Indian spectrum prices for 5G still loom large with the recommended base price 30−40 percent higher than that in other markets (South Korea and the US) where 5G has been launched. This coupled with the existing financial stress (including AGR dues) poses a daunting task for the telcos.

While the COVID 19 pandemic may have been a temporary impediment in the direction of India becoming a US$ 5 trillion economy, the government seems committed towards this goal. Needless to mention that the contribution of telecom industry will be imperative to achieve this goal. Key expectations of telcos from budget 2021 are:

• Investment incentives in the form of accelerated depreciation or investment allowance on capital investments. This will provide an impetus to foreign telecom gear manufacturing companies to set up manufacturing facilities, propel job creation and boost MSME’s in the sector
• Incentive plans and relaxation from tax/regulatory fee for few years on 5G acquisition to ease the stress of financial outlay in post 5G scenario
• Revisit spectrum charges and other levies faced by the telecom companies and potentially offer one-time amnesty schemes for past dues
• Provide reprieve from certain retrospective amendments introduced by Finance Act 2012. For example, royalty definitions do not apply to payments against telecommunication connectivity services including Interconnection Usage Charges (IUC). Government should clarify that payments for telecom bandwidth are pure service arrangements. This will go a long way to reduce litigation and more importantly relieve the domestic loss making telcos from the stress of cash blockage owing to tax withholding.
• India is a global R&D destination, with over 1,140R&D centres employing 900,000 professionals. A strong R&D and manufacturing ecosystem can benefit from each other, and incentivizing R&D in next gen technologies could help leverage India’s cost-effective science and engineering talent to build our strategic capabilities. The government may consider extending deduction of 200 percent of expenditure incurred on research and development in telecom, to bring in new technologies.
• Airtime sold by telecos through distributors is on a principal-to-principal basis and has been a matter of extensive litigation. Special provisions may be introduced to tax the profits earned by such distributors. Further, to improve the tax base and collections in tax, such revenues may be subject to tax deduction @ 1% at source. It is not difficult to calculate the expected increased cash in tax flows for the government
• For companies unable to claim MAT credit due to lapse of 15 year time window, amendments should be made in the law by removing the cap on time period within which MAT credit set off can be claimed. Most telcos paid MAT on their book profits for the years when they were eligible for tax holidays. Given that some of the telcos are currently incurring losses, removal of this cap of 15 years should increase the likelihood of telecom operators being able to utilize MAT paid during tax holiday periods

Reduction in Basic Customs Duty on telecommunication equipment from 20% to 10% and address input credit loss by bringing petroleum products under GST ambit. Further, disallowance of input credit on telecom towers under the GST law adds to the financial stress on the sector. Despite telecom towers accounting for a major part of the input cost, input credit on the same is expressly denied under Sec. 17 of the CGST Act, which has adversely hit the sector. Input credit on telecom towers should be eligible and restriction on credit under Section 17 of CGST Act should be removed so that the GST component does not add to the telcos cost base.
CT Bureau