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TelecommunicationsPost-budget sectoral point of view
Union Budget 2015Inspiring confidence,
empowering change in India
Table of contents
1. Context
2. Key policies/fiscal and tax proposals
3. Unfinished agenda
© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3
Context
Where are we The Indian telecom market is fast nearing billion subscribers mark1. There is a market shift towards data, that is in turn accelerating technology shifts to 3G and 4G LTE. Focus on rural markets to drive subscriber numbers has led to healthy penetration levels with more potential in the short to medium term. Increasing smartphone penetration, uptake of mobile internet, competitive tariffs and aggressive network rollout are some of the other major factors fuelling subscriber addition.
The emergence of mobile value added services (MVAS) is expected to help telecom operators bring in newer revenue streams. Heavy consumption of data oriented media services on mobile devices like video, social networking, games, file sharing, etc. has given a much needed impetus to usage driven revenue growth. ‘Make in India’ and ‘Digital India’ initiatives have opened up a plethora of opportunities for the entire telecom ecosystem and in turn stands to enable socio-economic growth of the entire country. The government is keen to leverage the reach and ubiquity of mobile devices in its drive to transform governance, deliver social services and achieve its vision of a cashless economy.
On the regulatory and policy front, initiatives to address industry concerns like spectrum, taxation, role of over-the-top players, mergers and acquisitions (M&As), etc. have sent out a positive signal of industry-government collaboration.
Key issues/challengesAmidst the subscriber success story, growing revenues and policy initiatives, the sector is still facing hurdles on several pressing issues. Some of the issues that continue to plague the sector’s growth are:
• Complex tax structure
• Absence of country-wide mobile and internet connectivity
• Huge debt bill of mobile services operators
• Infrastructural status and benefits
• Lack of a spectrum roadmap (quantum, auction of other bands, sharing, trading guidelines, etc.)
• Various legal issues related to spectrum, tax, penalties, etc. are pending in various courts of law
• Lack of single-window approval for Right of Way (RoW) norms for network infrastructure.
What was expected• Rationalisation and simplification of the tax structure
• Implementation of Goods and Services Tax (GST)
• Tax incentives to boost manufacturing in line with the ‘Make in India’ initiative.
1. TRAI (Telecom Regulatory Authority of India) Date December 2014
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ImpactThe Finance Minister seems committed to growth, fiscal discipline, creating a business-friendly stable policy, regulatory and taxation environment. The issues surrounding the telecom sector are a combination of policy initiatives and tax measures. Focus on infrastructure, capital formation, transparency in governance and digital connectivity not only helps the telecom industry as a key contributor to the economy but also throws up a number of business opportunities.
The Union Budget includes the measures which will have a direct and indirect impact on the telecom sector. Key announcements include:
PolicyCommitment to growth and fiscal discipline
• Growth expected at 8 to 8.5 per cent; Inflation targetted at 6 per cent
• Head-room for monetary easing and strength in sovereign credit rating
• Interest rates likely to be stable in the short to medium term, this is likely to help the telecom industry which is burdened with a debt of nearly USD40 Billion and is likely to rise given immediate investment requirement.
Digital India• Speeding up the implementation of the National Fibre Optic Network Programme, covering 7.5 lakh
kilometres connecting 2.5 lakh villages which will enable bridging the urban-rural digital divide• Reimbursement of state government costs will enable greater participation• Proliferation of mobile/internet enabled applications in sectors such as agriculture, health,
education and governance is likely to grow.
Move towards cashless economy• Positive steps towards integrating Jan Dhan, Aadhaar and Mobile (JAM) for direct transfer of
benefits• Focus on banking the unbanked and leveraging ubiquity of mobile devices is a positive growth driver
to mobile payments system and mobile banking.
Rural electrification• Electrification of 20,000 villages could help the telecom industry gain a better control over their
operational costs.
Direct tax• Reduction in corporate tax from 30 to 25 per cent from the next fiscal year is likely to be welcomed
by the industry
• Rate of income tax on royalty and fees for technical services reduced from 25 to 10 per cent
• Implementation of General Anti Avoidance Rule ('GAAR') to be deferred by two years
• Increase in specified domestic transfer pricing threshold from INR5 crore to INR20 crore.
Key policies/fiscal and tax proposals
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Indirect tax• Excise duty has been structure from 12 to 2 per cent without CENVAT credit or 12.5 per cent with
CENVAT credit for tablet computers
• Excise duty rates on mobile handsets including cellular phones, is revised from one per cent without CENVAT credit or six per cent with CENVAT credit, to one per cent without CENVAT credit or 12.5 per cent with CENVAT credit. NCCD of one per cent on mobile handsets including cellular phone, remains unchanged
• Wafers for use in manufacture of IC modules for smart cards has been modified from12 to 6 per cent to assist manufacturers of telecom enabled services such as smart grids and 'internet of things'
• HDPE for use in manufacture of telecommunication grade optical fibre cables reduced from 7.5 per cent to nil
• BCD on High Density Polyethylene for manufacture of telecommunication grade optical fibres or optical fibre cables is being exempted
• General effective customs duty rate has been increased marginally from 28.85 to 29.44 per cent -Education Cess and SHE cess continues on BCD and CVD
• Effective Excise duty rate increased from 12.36 to 12.50 per cent w.e.f 1 March 2015, Education Cessand Secondary Higher Education Cess has been withdrawn
• Effective Service tax rate to be increased from 12.36 to 14 per cent (education cesses have been subsumed), from a date to be notified after the enactment of the Finance Bill
• Proposal to levy two per cent Swachh Bharat Cess on the value of taxable services to be notified at a later date.
© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 6
Unfinished agenda
Immediate priority areas for telecom• Stronger integration with Financial Services, Healthcare and Education sector including working
closely with the government on various direct transfer benefits schemes
• To help in the movement towards a cashless and a digital economy
• Working with state governments to have rural specific strategy involving cross sector alliances
• Leverage start-ups for content development and other value added services, providing boost to technology start-up companies
• Boost 'Make in India' through tie-ups of several Indian based telecom businesses.
What remains Promote capital formation and channel funding to innovation• Tax rebates and matching grants for Public/Private/Academic research collaboration, technology
commercialisation and development of intellectual property
• Classify high technology sector using IT and Telecom services on par with priority sectors for lending purposes, reduced interest rates to make these industries globally competitive.
Workforce skill development• Tax rebates for 'Bridge-education' programs – bringing in the private sector to enhance workforce
employability
• Matching skills-gap grants to incentivise private participation in specific locations such as the East and North East regions.
Telecom equipment, component and handset manufacturing• Tax holiday for domestic manufacture given that demand is expected to rise significantly over the
next five years
• Exempt customs duty on equipment manufactured in SEZs but cleared for domestic sales
• Promote capital investments in the sector by extending Section 35 AD benefits that allow accessories producers 150 per cent deduction of capital investments.
Other taxation related matters
• Clarification required on the 2012 retrospective amendments proposed to exclude standard telecom services from the ambit of ‘royalty’ provisions.
• Clarification required on levy of withholding tax on discounts allowed to distributors selling pre-paid SIM card/ recharge vouchers.
What is expected going forwardThe telecom industry has shown signs of resilience so far. The sector is due for the next level of accelerated technological advancement and innovation. Companies are best suited to leverage their geographic reach and device ubiquity to support the government in a leakage proof, transparent cashless economy through mobile payments and banking. Greater connectivity is likely to unleash entrepreneurship and innovation across the country especially in the 'Internet-of-things' applications.
However, the government must remain on the path of providing a business friendly and consistent framework for the industry to operate. Details of a number of initiatives on management of spectrum and enabling a conducive mergers and acquisitions environment are expected in the short-term which will need to be examined in the context of overall pronouncements.
The information contained herein is of a general nature and is not intended to address the circumstances
of any particular individual or entity. Although we endeavour to provide accurate and timely information,
there can be no guarantee that such information is accurate as of the date it is received or that it will
continue to be accurate in the future. No one should act on such information without appropriate
professional advice after a thorough examination of the particular situation.
© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All
rights reserved.
The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of
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