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Updated: February 16, 2010 21:14 IST

Will Budget respond to telecom’s call?

D. Murali
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N. Madhan, Tax Partner, Ernst & Young
N. Madhan, Tax Partner, Ernst & Young

In the telecom space, the most prominent fact that grabs the attention of N. Madhan, Tax Partner, Ernst & Young, is that mobile phones have assumed the position of absolute necessity in view of easy availability of low-cost mobiles, better network, value-added services, and competitive pricing provided by the telecom service providers.

The Telecom Regulatory Authority of India (TRAI) has targeted 20 million broadband connections by 2010, up from the current 4.3 million and a huge growth is also anticipated in the subscriber base on 3G services, he adds, in the course of a pre-Budget email interaction with Business Line.

“While the revenue from operations for the operators keeps going up on account of the expanded customer base, price-war pulls down the margins of the service provider. In this scenario, the telecom industry has certain key expectations requiring the Finance Minister’s attention,” Madhan notes.

Excerpts from the interview.

On the effective utilisation of capital.

Concentrated investment in specific parts of the country denies the benefit of the telecom facility to the rural parts of the nation. This also imposes challenge on capital rationing for the service providers.

The solution that could address this issue is hiring telecom infrastructure from the infrastructure service providers. Incentivising such infrastructure service providers with accelerated depreciation or benefit of the investment allowance or tax holiday benefit under Section 80 IB of the Income-tax Act would ensure creation of infrastructure across the country.

To facilitate such effective utilisation of infrastructure, the existing players would restructure their operations, by transferring the infrastructure to other entities. Since such transfers would result in better utilisation of existing resources, it would be ideal to have these transfer tax neutral.

On boosting capital inflow.

With the urgent need for further investment in technology, infrastructure, and spectrum charges, the need for the capital is very high. It would be essential that the Finance Minister brings in appropriate incentive in attracting capital to this expanding industry.

The Finance Minister may consider bringing in the exemption on capital gains and other income for the companies or infrastructure funds, which provide long-term finance to the companies in the telecom industry.

Similarly, investments into such funds/ companies through deposits could be made eligible for deduction from any capital gains made by the taxpayers.

On withholding taxes.

The industry is facing a high degree of uncertainty with reference to the present provisions on tax deduction at source, especially on the income earned by the distributors of prepaid cards and with regard to payments made for the interlinking/ bandwidth charges.

While the entire telecom service is provided by the licensed service provider, the sales of such services are made through the supply chain at various levels. The service providers consider the transaction of distributing prepaid vouchers and SIM cards as a transaction involving sale, while the Revenue authorities consider the same as a transaction involving agency and commission.

This has resulted in litigation on the liability to deduct tax at source on the profits earned by the distributors, assessing the gross profits of the distributors as disallowance of commission, for the telecom service providers. Clarity on the above would bring in relief to the telecom service providers.

The telecom service providers make payments to other service providers towards interconnection charges and for using the bandwidth infrastructure. While these payments are considered by the payers as standard services not liable to deduction of tax at source, the Revenue authorities consider these payments as royalty or as fee for technical service or as rent and accordingly penalise the service providers for non-deduction of tax.

The position being adopted by the Revenue authorities is in deviation of international practice, though backed by a few decisions. The industry expects the Finance Minister to bring clarity to this issue, preferably in line with international practice.

Keywords: TRAItelecom service

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