By Siddhartha Tipnis and Promod Batra

Budget 2020 India: Low communication costs, price points and other macro-economic events such as demonetization have leapfrogged India on digital adoption over the past 18 months. India’s digital footprint is quite prolific — over 1.2 billion mobile subscribers, about 450 million social media users and over 200 million Indians using mobile banking and digital payments. At the current pace, it is estimated that India’s digital economy has the potential to reach $1 trillion by 2025.

Telecom infrastructure and services are increasingly emerging as critical determinants of a global economy’s growth and well-being. With an inherently mature IT / ITeS sector, India stands poised to benefit from harnessing new digital technologies and platforms to unlock productivity, as well as to reach unserved and underserved markets; thus catalysing economic growth and development, generating new-age jobs and livelihoods, and ensuring access to next generation services for its citizens. A recent Deloitte study estimated the digital economy in India contribution at about 5% to the GDP. This is likely to grow by 1.5-1.75 times in the next 2-3 years.

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However, the telecom engine room, which fires this digital growth continues to be under severe stress. India’s airwave (spectrum) prices remain one of the highest in the world. Some of the long incumbent telecom operators are under significant strain with an overall debt of Rs 4 lakh crore. Almost 1/4th of this pertains to licensing fees and related dues. A sustained hyper-competitive environment and a multitude of indirect levies ranging from telecom regulatory fees linked to revenues, custom duties on imported telecom gear and the GST regime of 18% have further added to the financial stress. This situation has led to most players operating at negative EBITDA. Some incumbent players have begun reconsidering their future investment plans for 5G and national broadband, which are slated to form the fulcrum of Government’s ambitious Digital Communications Policy.

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If India has to become a $5 trillion economy sooner, telecom will be one of the pillars on which the foundation would be laid. The task before India’s policy makers is to ensure that the advantages of the telecom infrastructure and related technologies supports its divergent demography, economic conditions and urbanisation. Some key expectations of the sector from the upcoming Budget are:

Offer investment incentives, either by way of accelerated depreciation or through additional allowance in respect of capital investments, to attract foreign telecom gear manufacturing companies to set up manufacturing facilities in India. This will support the government initiative for job creation and will also boost small and medium enterprises in the sector.

Incentive plans and relaxation from tax / regulatory fee for initial years on 5G acquisition to ease the pain of financial out-go in post 5G scenario.

Relook at spectrum charges and other levies faced by the telecom companies, potentially offer one time amnesty schemes for past dues.

Clarify impact of certain amendments introduced by Finance Act 2012. For example, royalty definitions does not apply to payments made for Interconnection Usage Charges (IUC). It is needed to clarify that payments made for bandwidth arrangements are pure service arrangements. This will go a long way in reducing litigation pending in various courts.

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Introduce litigation settlement scheme, similar to Sabka Vishwas – Legacy Dispute Resolution Scheme to settle the long pending disputes.

Extending deduction of 200 percent of expenditure incurred on research and development in telecom, to bring in new technologies. The same should be extended beyond 2021.

The airtime sold by telecom companies through distributors is on a principal-to-principal basis and has been a matter of extensive litigation. In the interest of both telecom companies and the revenue authorities, special provisions may be introduced to tax the profits earned by such distributors. Further, to improve the tax base and collections in tax, such revenues may be subject to tax deduction at 1 per cent at the source. Seeing the revenues of telecom companies, it is not difficult to calculate the expected increased cash in tax flows for the government.

Abolishing DDT and making dividends taxable in the hands of shareholder would make foreign investors eligible for credit of tax in their home countries, thereby improving the return on their investment.

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In order to address the situation of companies being unable to claim MAT credit due to lapse of the 15 year time window, necessary amendments should be made in the law by removing the time period within which set off of MAT credit shall be claimed.

The Government is very keen to jumpstart the 5G commercial lauch in India and enhance the national broadband footprint. To achieve these macro objectives in a better way, the telecom sector does need a helping hand…right now. As such, the Government can take some definitive steps to create an environment that provides the necessary impetus for next evolution of growth in the sector and resolve some long outstanding issues.

Siddhartha Tipnis and Promod Batra are Partners at Deloitte India. Views are the authors’ own.