Budget 2023: Telecom sector seeks policies to support capex

Ahead of the nationwide commercial deployment of 5G, there is a need to address the liquidity crunch faced by the telecom service providers. (Representative Image)

The telecom sector has been instrumental in uphol.ding the momentum during extraordinary COVID times and emerged as a ‘lifeline’ for India enabling businesses to function during lockdowns.  The surge in demand for flexible workspaces and the evolution of work from home ecosystem besides the growth of the digital economy has significantly increased the dependency on this sector wherein the need for robust network and connectivity upgradations has become even more critical. Keeping in view the significance of this sector and to give further impetus to the growth of the digital economy, the government has announced a series of reforms such as the moratorium on payment of adjusted gross revenue (AGR) dues, 100 percent foreign direct investment (FDI) through automatic route, reduction in bank guarantees, production-linked incentive scheme (PLI) for telecom gear, etc. which has been quite positive for the telecom companies.

The recent launch of 5G has marked 2022 as the landmark year which has propelled India towards the vision of Viksit Bharat. 5G rollout shall have a striking impact on India’s technological development, spur business innovations and would foster job creation in the country. It shall augment output as well as efficiency in all spheres of economic and social sectors and shall act as a catalyst for innovative technologies like artificial intelligence (AI), internet of things (IoT), data centres and data analytics.

Lower licence fees

The telecom sector, indispensable for the digital economy, is looking forward to the Finance Minister tabling a cogent and enabling Budget on February 1, 2023. Telecom is a capital-intensive sector and to meet the ever-growing demands of the economy, continuous upgradation in technology and expansion of the network is necessary. With the sector gearing up for a nationwide commercial deployment of 5G, there arises a need to address the liquidity crunch faced by the telecom service providers. One of the things on the wish list of the sector is the reduction in license fees from three percent to one percent and the abolition of the Universal Service Obligation Fund (USOF).

On the direct tax front, a critical industry ask is the rationalisation of the retrospective amendment brought in 2012 which widened the definition of ‘royalty’ to include charges for transmission by satellite, cable, optic fibre, etc. The amendment has resulted in tax authorities taxing standard telecommunication charges and raising substantial tax demands on telecom operators, including foreign telecom companies not having any presence in India. The industry expects the government to re-emphasise the supremacy of tax treaties and clarify that the amendment does not override the treaties.

Another persistent request from the telecom operators is towards the settlement of the long pending dispute with respect to the applicability of withholding tax provisions on trade margins extended to telecom distributors under a ‘Principal to Principal arrangement’. Considering the lower margins involved, going forward, a withholding tax rate of 1 percent may be prescribed.

Need Better Classification of Imports

The telecom industry is highly dependent on the import of key network equipment. Increased rates of custom duties on telecommunication equipment cast a substantial dent in the cost sheets of the industry players. Though increasing customs duties was a step towards the government’s vision to foster the ‘Make in India’ initiative, however, the absence of domestic alternatives currently leaves them with no option but to import this equipment at a higher cost.

Recently, notices have been issued to various telecom equipment suppliers disputing the classification of imported products. The same is due to the reason that there is an ambiguity with respect to classification and exemption available to various parts/products specifically those falling under two tariff heads. As globally done, these tariff headings should be broken down into subheadings to clearly lay down goods included in each subheading linked to exclusions specified under the customs tariff notification of 2017 to avoid such disputes. The sector is hoping for requisite clarifications in Budget 2023 to stop unsolicited disputes on this account.

Nagging GST Issues

The current practices and tax policy have led to the accumulation of massive goods and services tax (GST) input credit which is immobilising the cash flows of the sector. To ensure operating liquidity, it is a long-standing demand of the telecom operators that a refund of accumulated GST credits of Rs 32,000 crore be allowed to release the choked working capital. Moreover, the need to discharge GST in cash on license fees, spectrum acquisition charges and spectrum usage charges is acting as a multiplier to the existing liquidity crunch. Therefore, scrapping GST on said charges or allowing the payment using input tax credit will assist the sector in utilising funds to deploy the 5G network across the country.

The sector is also witnessing the denial of the input tax credit of GST on passive infrastructure. While the industry players were seeking an allowance of the input tax credit on telecom towers, disputes have arisen on the eligibility of credits on critical telecom equipment installed at telecom towers. A clarification to put an end to this unnecessary litigation would be a sigh of relief for the sector. Moreover, to facilitate ease of doing business and unburden the industry from stringent compliances - centralised audit and investigation under GST for ‘pan India’ service providers such as telecom operators is again a long-standing request.

The telecom sector has always been a pivotal arm of the Indian as well as the global economy. The announcement of PLI 2.0 and design-led PLI for telecom and networking products clearly illustrates the government’s commitment to the growth of this sector and the vision of Aatmanirbhar Bharat. The Ministry of Communication has granted approval to 42 companies (including 28 MSMEs) under the said scheme, expecting incremental sales of Rs 2.45 lakh crore and additional employment of more than 44,000 people. The government set aside Rs 84,586 crore in the last budget for the Department of Telecommunications, out of which 64 percent was earmarked for capital expenditure. Now, with the upcoming Budget 2023, the industry is eying further capex support from the government to accelerate the deployment of 5G infrastructure. The aforesaid reforms would stimulate the growth of the telecom sector for many years to come and enable the players to invest significantly in networks and services to continue giving our society an incredible experience of technology.

Vishal Malhotra and Kunal Chaudhary are Tax Partners, EY India. Views are personal and do not represent the stand of this publication.