Politically correct. Those were the words that described last year's union budget. With more emphasis on agriculture, infrastructure, and education, there was a concerted effort to keep a large part of the society happy. From an industrial perspective, telecom has been cornered in the last few budgets, despite being a vital component in the country's growth. But the scenario may be different this year. 2007-08 has proved to be a path-breaking year for the Indian economy. The Sensex made headlines through the year, and is still on the climbing mode, fluctuating once in a while. The Indian rupee was on a mission to conquer the dollar, and during the third quarter of the year, this race affected the whole economy in a negative manner, especially the IT and ITeS industry.

The growth in the telecom sector alone has been humungous. With a mobile teledensity around 20%, there are 210 mn subscribers in the country today. The subscriber base is growing at a rate of 8 mn subscribers per month. Mobile companies have invested about Rs 80,000 crore in various projects, and this investment is still growing at a rate of 12% per annum. Telecom has also contributed to the growth in manufacturing and R&D sectors. Brands like Nokia, Samsung, LG, and Motorola have established their manufacturing facilities in the country.

Telecom operators are now rolling out services in rural areas where cost of providing services is higher, per capita income is lower, and potential end users have a reduced purchasing power. This is the only sector in India that has continuously absorbed inflation and, today, provides the most affordable mobile services in the world. Mobile service providers are making huge commitments toward aggressive rollout of services in rural and remote areas in order to facilitate the achievement of the government's objective of 250 mn subscribers by 2007 and 500 mn by 2010.

When industry associations say there is need for a critical examination of the philosophy of application of duties and levies on telecom, which is an important requirement for ensuring sustainable and accelerated growth of the sector, they are very right. It is now difficult to overlook the growth and opportunities in the telecom sector. Telecom is going to play a key role in the years to come. Though fulfilling all the demands may not be feasible, the finance minister should lay down a proper strategy regarding telecom.

Unified Tax System
A unified tax system seems to be topping the list of demands. In the earlier budget, the government recognized the problem of a multiple tax structure and asked the Department of Telecommunications (DoT) to come up with a study for a unified tax proposal. However, this remains pending and the industry is eagerly waiting to hear something regarding this in this year's budget. "Implementation of a single tax will address several demands of the industry arising out of different anomalies suffered by manufacturers, both during DTA sales and in exports. Therefore, we recommend uniform single taxation across the country, facilitating free movement of goods and reimbursement of the same at the point of exports," says Rakesh Malik, secretary general, TEMA.

Revenue Sharing License Fee
In 2006 the government reduced the revenue sharing license fee, including USO contribution for long distance services to 6% from the earlier 15%, which is still effective. The demand for further reduction was made last year also and the industry sticks to this demand. Currently, the Telecom Access Service Providers are paying a high percentage as license fee through a revenue sharing model. This revenue share ranges between 6-10% of Adjusted Gross Revenue (AGR) per annum, depending on the category of licensed circle service area.

"It is of utmost necessity to reduce the license fee from the present level in view of the fact that presently, in addition to the license fee (6-10%) and the spectrum fee (2-6%), service providers pay service tax of 12%," says SC Khanna, secretary general, AUSPI. Khanna is demanding reduction in unified service license fees also: "In line with this decision of reduction in revenue share license fee for long distance services, there should be reduction in license fee to 6%, including the USO levy for Unified Access Service Licensees (UASLs) as well so as to maintain a level playing field condition among service providers.

Why USO?
Service providers contribute a uniform levy of 5% of the AGR toward the USO Fund. The levy was necessary to subsidize service providers to roll out services in the rural and remote areas. "With expansion of mobile services, the growth is now seen only in the rural and remote areas, thus effectively bridging the digital divide," says Khanna. It was also observed that during the bidding for the USOF support for setting up and managing infrastructure sites and provision of mobile services, many service providers, including PSEs, were ready to provide services without subsidy. The levy collection has increased manifold and the fund remains unutilized every year. With an estimated collection of Rs 4,500 crore in the year 2007-08, cumulative balance, as of now, has reached an approximate of Rs 14,000 crore.

The demand for reduction was also made before last year's budget but, this time, it has been further strengthened by a TRAI recommendation in this regard. TRAI, even in its recent recommendation to the government, has said that for covering 75% of development blocks in service areas there should be a reduction in the contribution to the USO Fund to 3%. AUSPI suggests a two-step reduction in USO Fund contribution. In the first step, reduce the contribution to 3% this year and next year the contribution to the fund should be zero.

Spectrum Charges
In India, annual spectrum usage charge is 2-6% of AGR of the service provider, which is very high compared to some Asian countries like China, Sri Lanka, and Pakistan. The amount of spectrum usage charges collected as royalty from operators offering mobile services has been increasing over the years and the amount for FY 2006-07 is estimated to be about Rs 2,100 crore. It is estimated that telecom subscribers pay a total of about 30-35% as taxes and levies including spectrum usage charges. Again this demand is pending for years and crops up every time before the budget. "To provide affordable services to subscribers so as to meet the projected teledensity target, it is suggested that spectrum usage charges be brought down to 0.5% of the AGR, just to recover the cost of administering and regulating the spectrum resource," says Khanna.

Export of Services
There is a contradiction between the Foreign Trade Policy (FTP) and the Service Tax Law over the issue of export of services under the Service Law. Under the Export of Services Rules 2005, any service provided by a service provider is treated as export and exempted from service tax, if services are provided from India to be used outside, and payment for services is received in convertible foreign exchange.

The law approves provision of roaming facility by an Indian telecom operator to the customer/subscriber of a foreign telecom operator while the customer/subscriber is in India. FTP recognizes this service as export, eligible for benefits provided under the policy. However, as per the Service Tax Law, such a service does not merit exemption, as services are provided in India. Similarly, services provided in India relating to exports are recognized as exports under the FTP, while the same does not merit exemption under the Service Tax Law. "The government should come up with a clear stand and clarify the issue regarding applicability/non-applicability of withholding tax," says Malik.

Interconnection Usage Charges
This does not bring any revenue for the government, and industry associations feel that it should be called off. Interconnect usage charges are not in the nature of fees for technical service, but for allowing the call from one service provider to be carried over to the other service provider. As such, the existing telecom service providers have to provide interconnection of their networks, equipment to the networks, and equipments of the new telecom service providers to provide subscribers efficient and flawless service. These interconnection issues between service providers are very crucial for DoT and TRAI.

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