1 Presentation to Department of Telecommunications Pre-Budget Recommendations Association of Unified Telecom Service Providers of India 29 December, 2005 : New Delhi

2 Cont’d…. Telecommunication  Growth potential in the telecom sector is enormous.  Only 30% population presently covered.  Employment generation.  Revenue generation for the government.  Contribution to GDP  Teledensity closely co-relate with GDP growth.  In India, rapid increase in telecom infrastructure has multiple benefit –US dollar 1 investment in telecom leads to increase in US dollar 6 in GDP [source: World bank]  10% increase in teledensity correspond to 0.2% - 0.6% increase in GDP [Source: Vodafone]

3 Telecommunication  Rural Development  Economic benefits of mobile telephony leading the growth According to a recent study conducted by an international agency, Ovum on “The Economic benefits of mobile service in India”, the Indian Mobile industry is a major contributor to the social and economic growth of the country, in terms of employment generation, government revenues, GDP growth, rural development, etc. Cont’d….

4 Telecommunication The world is moving towards convergence mode because of the tremendous potential of the ICT and the impact it has on every other sector. Planned development and use of ICT hold the key to faster growth and give the country a competitive edge in the globalised economy. [Source: Mid term appraisal of 10 th plan, Planning Commission]

5 Cont’d…. Telecommunication  Access to telecommunication is key to development and growth and provide new and exciting opportunity to those who have access to them.  Communication technology supports reduction of poverty by:  Increasing the efficiency of the economy  Enabling better delivery of public service (health & education)  Creating new source of income  Creating employment and training to poor population.  Technology innovation making communication technology very affordable and opportunity to bridge the digital divide.

6 Telecommunication quote Given this growth target, India has the potential to surpass China’s mobile growth in terms of subscriber. This however, needs suitable strategies and policies. [source : Strategy Paper on Telecom, MoF] unquote Quote The importance of telecommunications to the economic growth of the country has been highlighted by various studies as they consider that a strong link exists between telecom penetration and GDP growth and productivity of a country. Use of telephones and other information and communication technologies can result in substantial improvement in the level of household and business incomes. This fact has also been emphasized by the government as can be seen from its goals in the Common Minimum Programme (CMP), key among which is the promotion of e-governance on a massive scale, which will enable the common man to access government services in an efficient, convenient and cost effective manner. [source : Strategy Paper on Telecom, MoF] Unquote

7 Revenue Share License Fee Cont’d…. Why Revenue Share License Fee for Telecom?

8 Reduction in Revenue Share License Fee Unprecedented growth of telecom sector resulted in exceeding target of NTP 99 much ahead of stipulated time. This growth has been facilitated due to reduction of license fee after migration to revenue share regime. MOF has stated that: Quote A reduction in the absolute amount of these duties and levies shall allow telecom service providers to plough-back profits into enhancement of network and services. It is interesting to note that even with a reduction in the license fee chargeable from telecom service providers, the government can continue to collect the same revenue. This is so, because license fee is payable by telecom service provides as a fixed percentage of their revenue. With steadily rising revenues in the telecom industry, the absolute amount collected by the government will remain constant even if the percentage revenue share payable is reduced in a given proportion. [Source : Strategy Paper of MoF] Unquote Cont’d….

9 Internationally, telecom services attract much lower levies than that of India India has one of the highest tax regimens in the World, and levies must be reduced to bring them in line with International best practices * Backbone spectrum charges extra **Est. from Spectrum fees & revenue of China Mobile (Source: TRAI) High percentage of revenue share to be brought down to 6% including levy for USO fund High service tax of 10.2% to be brought down (already 1/3 of the total collection of service tax is estimated to be from telecom services) With growth of 3 to 4 million subscribers per month the additional revenues will in any event compensate for reduced taxes and levies PakistanSri LankaChinaIndia Regulatory charges% age of revenue%age% age of revenue Service tax, GSTGSTVAT3%10% + GST License Fee0.5% + 0.5% R & D0.3% turnover (t.o.) + 1% of capital invested (inv) Nil5 – 10% Spectrum ChargeCost recovery~1.1% to t..o~0.5%* (China Mobile) 2 ~ 6%** USO1.5%Nil (only on ISD calls)NilIncl in license fees Total Regulatory charges 2.5% +GST+ cost recovery 1.3% t.o.+1% inv+VAT0.5%+3% (Tax)17%~26% + GST Reduction in Revenue Share License Fee Cont’d….

10 Reduction in revenue share license fee would not affect government revenue as with increase of subscriber base, government revenue also increases substantially. ESTIMATE OF GOVT. LEVIES FROM LICENSE FEE, SPECTRUM FEE &SERVICE TAX ON ALL TELECOM SERVICES YearGross Revenue AGRLicense feeService tax * 5-10% Spectrum Charge 2-4% Total Govt. Levies [Source: TRAI] Rs in Crores Reduction in Revenue Share License Fee * Rate of service tax taken as 5% upto , 8% upto and 10% thereafter. Cont’d….

11 Reduction in Revenue Share License Fee In line with recent government decision of reduction in revenue share license fee for long distance services, there should be uniform reduction in license fee to 6% including USO levy for UASLs.

12 Adjusted Gross Revenue (AGR)  Accurate definition of AGR to avoid issues like double taxation, unrelated activities  AGR defined by DoT should exclude income from unrelated activities such as :  Interest income from investment  Dividend income from investment  Revenue from sale of handsets  Sale of other assets  Revenue from sale of capital goods  Revenue from sharing of leased infrastructure  If the above items are not included in the calculation of AGR, results in lower incidence of license fee and consequent benefit to consumers Source : Strategy Paper, MoF

13 Adjusted Gross Revenue (AGR) STRATEGIES AND POLICIES AS PER MOF STRATEGY PAPER ON TELECOM  Revenues not related to telecom should be excluded from AGR.  Any interest earned on invested fund should not be included in the AGR for the following:  Operators being infrastructure companies require cash margins to get BG.  Infrastructure loan require debt service reserve accounts for making payments of short term installments. Funds kept in such accounts earn interest.  Infrastructure project including telecom project get disbursements from FIs/banks on the basis of expenditure and interest is earned on disbursement for shorter period.  Huge amounts received under IPOs also earn interest till those funds are deployed.  Rate of return on such investments is much lower than the cost of borrowed funds.  Interest and dividend income should not be included in the AGR. In case it is considered as an income, then a set-off against interest payments on such borrowed funds, should be allowed.

14 Adjusted Gross Revenue (AGR) STRATEGIES AND POLICIES AS PER MOF STRATEGY PAPER ON TELECOM  Any receipt from sale of handset, accessories etc should not be included in the AGR as the licensee himself purchases these items which are sold either at the same price or by adding a small mark up.  Receipts from sale of capital goods are miscellaneous income not derived from the provision of telecom services. No revenue share should be payable on this amount in the form of license fee.  Inclusion of bad debts in the AGR amounts double burden on the company since the company has been unable to recover the amount from its subscriber and in addition it required to pay a license fee from such unrealized amount. If revenue has not been collected, licensee should not suffer incremental cost of license fee on bad debts.  As waivers and discounts given to subscribers do not actually accrue as revenue to the licensee, the operators should be allowed to “net off” such charges against revenue as these are actually deducted from the revenue. The government recognizes trade discounts given by a trader as an allowable reduction for the purpose levying sales tax, which is levied on the amount actually collected after deducting the discount. In the same line, inclusion of discount or waiver in AGR need to be examined.

15 SINGLE TAXATION  Telecom service faces multiple taxes and levies which are one of the highest in the world.  Total levies on the telecom sector are around 21% of the AGR including license fee, service charge, spectrum charge etc.  Customer pay atleast 30% of the actual telecommunication bill directly or indirectly.  The convoluted tax structure needs to be addressed urgently.

16 SINGLE TAXATION FM promised in his Inaugural Address at the 77th FICCI Annual General Meeting on 27th December, 2004 that he will address the complex taxation structure presently existing in the Indian telecom sector and come out with investor-friendly, industry-friendly simple tax structure in this budget of Relevant extract of his speech is reproduced below: Quote “The second aspects which your President touched upon are four sectors which, while he may have referred to them in one context, are extremely important to me in another context. These are – textiles, petroleum, sugar and telecom. Now, what is common among these four? In my humble view, what is common among these four sectors is a convoluted tax structure that applies to these sectors. From time to time, all of us have contributed to the convoluted tax structure. We have to unravel this. We have to make this simple, investment friendly and industry-friendly. Last year, you will recall, I made a beginning with one part of the textile sector, namely natural fibres. And I acknowledge readily that it is an unfinished exercise, that there is another part of the textile sector, namely man-made fibres, which requires attention. But to textile we must add petroleum, sugar and telecom as sectors which have a very complex taxation structure. I promise that we will address this complex taxation structure and come out with an investor-friendly, industry-friendly simple tax structure in the next budget.” Unquote

17 Indirect Taxes CUSTOM DUTY  CVD for imported Fixed Wireless Terminals should be nil (currently 16%) similar to Fixed Line telephones and mobile phones. Currently there are nearly 8 million fixed wireless terminals. Growth per month is 3 lakh terminals approximately.  Microwave equipment – Custom duty for microwave equipment should be zero (currently 15%+(16%+2%)+2%) similar to Base Transceiver Station (BTS) under notification No. 7/2004- CUSTOMS dt 8 th January EXCISE DUTY Excise duty on locally manufactured equipment be at the lowest level of 8%. SERVICE TAX  Be reduced to 5% or lower level from the present level of 10%  Restriction of 20% as provided in Rule 6 of CENVAT credit rules 2004 should be raised to 35% for telecom sector.

18 Special emphasis on growth of broadband To achieve the targeted growth of broadband AUSPI suggests the following : -Allow 100% depreciation in the first year for PCs and CPE including modems and routers. -Reduce duties on inputs and finished products used in broadband. Detailed list submitted to the Department. -Central Excise Duty to be reduced. -Waive entertainment tax on broadband subscription and entertainment services. -Waive Sales Tax on goods and services that are transacted electronically.

19 Direct Taxes SECTION 80IA OF THE INCOME TAX ACT  The eligible period for the benefits be extended to 20 years from the current period of 15 years. BENEFITS U/S 80IA(4)(ii)  Be extended upto (from ). CONTINUANCE OF BENEFIT U/S 80-IA IN CASE SLUMP SALE TDS ON REIMBURSEMENTS TDS ON PAYMENTS COVERED BY 10 (23)G SECTION 10 (23G) OF THE INCOME TAX ACT, 1961  Income from investments of infrastructure capital company and infrastructure capital fund. SECTION 115JB OF INCOME TAX ACT  Exemption from MAT be extended to the telecom sector. SECTION 115(O)  Tax on distributed profits of domestic companies with respect to companies availing tax holiday u/s 80IA should be exempted from tax. RESTORATION BENEFIT U/S 80HHE  The benefits under above section discontinued from the assessment year be restored to its earlier level. CLARIFICATION REGARDING TAX TREATMENT IN CASE OF AMALGAMATION & DEMERGER INTERNATIONAL TAXATION ISSUES  Taxes on software and bandwidth payments – TDS provision should not apply on these payments. CLARIFICATION WITH RESPECT TO INTERNATIONAL ROAMING AGREEMENT

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