Budget 2018: Telecom sector left in the lurch yet again

Vishal Malhotra

Post demonetisation and GST windfall tax collections, the Budget 2018 was eyed as ‘populist’ being the last full Union Budget of the present ruling government. The focus of the government has largely been on strengthening the agriculture, rural development and infrastructure sectors. The healthcare sector has also received a boost after announcement of National Health Protection Scheme, which can be said to be the world's largest government funded health care programme benefiting about 10 crore poor families.

An allocation of Rs 10,000 crore has been announced on expansion of telecom infrastructure under various government projects in the country, however, the Union Budget does not bring any cheer to the telecom sector, which has been left in the lurch since the last decade or so. Taking note from the Economic Survey, the government is aware of the distressed state of affairs of telecom sector due to “growing losses, debt pile, price war, reduced revenue and irrational spectrum costs".

Although the government is expecting a revenue of Rs 48,661 crore from the telecom sector in fiscal year 2018-19, a 58 percent increase from the current revenue estimate of Rs 30,736 crore, none of the key problems faced by the telecom sector seemed to have been addressed including reduction of licence fee and spectrum usage charges payable to the Department of Telecommunications (DoT).

The telcos had expected amendments and clarifications on certain key direct tax issues such as exclusion of standard telecom services from the ambit of ‘royalties’, carry forward of losses & unabsorbed depreciation in case of amalgamation of telecom infrastructure companies, reduction in withholding tax rate on ‘commission’ payments to distributors of prepaid services, deductibility of expenditure incurred towards ‘right to use spectrum’ acquired prior to April 1, 2016 et al. However, none of these issues have been tackled in the fine print.

One of the positives from the direct tax proposals is the introduction of a provision that foreign exchange gains and losses other than on borrowing for import of assets shall be considered to be on revenue account. This shall assist telcos to avail cheaper foreign currency loans to finance and refinance spectrum purchases as also other domestic procurements. Another positive is the introduction of faceless tax audits or e-assessment of tax returns, which shall be rolled out across the country leading to elimination of personal attendance before the tax authorities. Further, the increase of threshold turnover to Rs 250 crores for availing the benefit of lower corporate tax rate of 25 percent is a positive move to uplift the MSME segment. The BEPS-driven reform agenda also continues with the amendment of the scope of ‘business connection’ under the domestic law in line with the Multi-Lateral Instrument (‘MLI’), but having said so, the tax treaties remain unaffected by this change.

Telecom, mobile and electronics sector is undoubtedly a key thrust area to support the Prime Minister’s ‘Digital India’ and ‘Make in India’ initiative. Budget 2018 has met the Domestic industry’s long pending demand of providing duty protection to support their manufacturing operations by proposing to increase the rate of customs duty on mobile phones from 20% from the current 15%.

The rates of customs duty on various mobile parts like batteries, SIM Slot, screws, other mechanical items etc. are proposed to be increased to 15%, which should encourage manufacture of these products in India. Besides mobile phone parts, there have been duty hikes in other accessories & related products like mobile covers, camera lens, smart watches as well.

Additionally, a ‘Social Welfare Surcharge’ has been introduced replacing the existing Education Cess and Secondary and Higher Education Cess on imported goods. However, the mobile phones shall remain exempt from the Social Welfare Surcharge.

Overall, the Union Budget 2018 has been acknowledged to be a balanced one as the government’s focus is primarily towards boosting the economy and fostering growth and at the same time, reducing the fiscal deficit. With the Budget proposals being implemented, the government can expect a boost in revenues and continue to push forward with its reform agenda whereas the telecom sector will continue to fight its own battle.

(The author is Tax Leader, Technology, Media & Entertainment and Telecommunications (TMT), EY India)