A STUDY ON KEY TAXATION IN TELECOM SECTOR

Introduction
Background
Indian telecommunications sector has undergone a major process of transformation
through significant policy reforms, particularly beginning with the announcement of NTP
1994. Historically, the process of expansion of the network was rather slow, being owned
and managed by the Government under the assumption that Telecommunications was a
natural monopoly best run as a state-owned monopoly.

By the early 1990s, this concept of a natural monopoly was increasingly challenged in
many countries by technological changes, especially in the wireless field and by laudable
success in several countries in lowering the cost of services for common man. Policy
makers in our country began process of reforms in the 1990s that led to gradual ushering
in competition for greater consumer welfare, particularly in terms of lowering of tariffs
and improvement in quality of service.

Second Phase - The Early Nineties

The second phase of reform commenced with the general liberalization of the economy in
the early 1990s and announcement of a New Economic Policy (NEP)-1991. Telecom
equipment manufacturing was de-licensed in 1991 and value-added services were
declared open to the private sector in 1992, following which radio paging, cellular mobile
and other value added services were opened gradually to the private sector.
National Telecom Policy was announced in 1994, with a major thrust on universal service
and qualitative improvement in telecom services and also, opening of private sector
participation in basic telephone services. An independent statutory regulator was
established in 1997. Progressively there was growth in private sector provision of
telecom services in the country.

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Third Phase - the late Nineties

The most important landmark in telecom reforms, however, came with the New Telecom
Policy 1999 (NTP-99) which can be termed as the new, or third, generation of reforms.
Its first qualitative difference was the acceptance by the government that
telecommunications was a sufficiently important for common man
Whereas earlier it had been viewed as a “cash cow”. For example, the private sector had
earlier been asked to bid for licenses to provide telecom services through a sealed bid
auction in which the bidder paid a fixed fee.

This proved unaffordable to the private sector owing to unrealistic calculations of the
revenue potential of a 4 license, resulting in a near zero rollout of lines. Rather than
insisting on the prior fulfillment of its revenue obligations, NTP-99 allowed private
providers to “migrate” from fixed license fee regime to a revenue sharing regime. The
second qualitative difference was that the regulator was strengthened, domestic long
distance services were opened to the private sector, and the state-owned basic service
provider under the Department of Telecommunications was corporatized.

The guiding principles of the NTP-99 are as follows:

1. Affordable and effective communications to citizens is the core of the vision and
goal of telecom policy
2. Balance between the provision of universal service to all uncovered areas,
including rural areas, and provision of high level services capable of meeting the
needs of the country’s economy
3. Building a modern and efficient telecommunications infrastructure to meet the
convergence of telecom, IT and the media

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4. Conversion of PCOs into Public Tele info Centers having multimedia capability
like ISDN services, remote database access, government and community
information systems etc.
5. Transformation of the telecommunications sector to a greater competitive
environment providing equal opportunities and level playing field for all players.
6. Strengthening research and development efforts in the country
7. Achieving efficiency and transparency in spectrum management
8. Protecting the defense and security interests of the country
9. Enabling Indian telecom companies to become truly global players.
Specific targets that NTP-99 seeks to achieve are:
10.Make available telephone on demand by the year 2002 and sustain it thereafter so
as to achieve a teledensity of 7 by the year 2005 and 15 by the year 2010.
11.Encourage development of telecom in rural areas making it more affordable by
suitable tariff structure and making rural communications mandatory for all fixed
service providers
12.Increase rural teledensity from the current level of 0.4% to 4 by the year 2010 and
provide reliable transmission media in all rural areas.
13.Achieve telecom coverage of all villages in the country and provide reliable media
to all exchanges by the year 2002.

14.Provide Internet access to all district headquarters

15. Provide high-speed data and multimedia capability using technologies
including ISDN to all towns with a population greater than two lakhs by the year
2002.

The key policy provisions of NTP 99 are:

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a. As mentioned earlier, a significant shift from the fixed license fee regime to a
license fee regime based on a revenue sharing mechanism
b. Interconnectivity and sharing of infrastructure among various service providers
within the same area of operations is permitted; cellular licensees can carry intra-
circle traffic
c. Separation of the policy and licensing function of the DoT from the service
provision function
d. National long distance services sector to be opened to competition from January 1,
2000
e. Service providers could carry both voice and data traffic.

NTP’99 is not just a policy document. It reflects a new philosophy, a new vision, a new
direction and a new commitment. The Government has undertaken its implementation
with utmost earnestness, in letter and spirit. The underlying theme of the reform process
has been to usher in full competition through unrestricted
entry in almost all the service sectors. The migration package to revenue sharing in place
of a fixed license fee was a particularly progressive policy step which has led to a virtual
‘take off” in growth of the cellular and basic service sectors. As a result of the reform
process, National and International data connectivity has been opened. Basically all
telecom services have been opened up for private sector participation except International
voice telephony. This segment was scheduled to be reviewed by the year 2004, but now it
has been decided that state monopoly of Videsh Sanchar Nigam Limited (VSNL) over
international telephony will be ended by 31.3.2002. Unrestricted entry has been allowed
in Basic Services on revenue sharing basis.

Internet services have been opened up without any restriction on the number of entrants
and without any entry fee. Cellular service providers are permitted to carry their own

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long distance traffic within their service area. There is no restriction on the number of
GMPCS licenses but the gateways for the GMPCS are to be
located in India. National Frequency Allocation Plan (NFAP- 2000) has come into force
on 1st January, 2000.

Indian Telegraph Act 1885 is being reviewed and a new Bill based on convergence is
likely to be enacted soon.
With all these measures, which have come one after another in quick succession, the
various telecom reforms committed under NTP-99 are almost complete, some ahead of
schedule.
Liberalization of telecom sector of the Indian economy aims at improving accessibility,
availability, reliability and connectivity through private sector participation and to bring
about much needed improvement in the Quality of Service (QOS). Through increased
competition, the service providers are expected to become more sensitive and responsive
to the customer’s needs and choices and endeavor to give him greater satisfaction.

The Telecom Regulatory Authority of India has the mandate to safeguard the customer’s
interests and to set the standards of quality of service. The rapid technological advances
which have taken place in the telecom sector have brought about significant
improvements in the quality of service provided to customers.

With the digitization of exchanges, and up gradation of external network, the fault rate
has come down from 17.37 per month per 100 stations in 1997-98 to 11.7% in 2000-01.
The target is to bring it to single digits during the year 2001-02.

About 95% of these faults are rectified within a week. The computerization of customer
services has also gone a long way in improving the quality of service. Some of the

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activities which have been computerized are directory enquiry, fault repair services,
waiting list, telephone revenue billing etc.
While the services have improved considerably, the customer is not always satisfied with
the quality of service he gets. The redressal of their grievances takes time. Awareness
about consumer rights is also lacking.
With this in view, the 10th Five Year Plan intends to provide for customer care and
services as one of its sector objectives. All service providers have to adhere to the QOS
parameters prescribed by the regulator, and extend state-of-the-art services and
technologies to the customers. The regulator is expected to create awareness
among customers about their rights and the obligations of the service providers.

The regulator should have adequate machinery to monitor and supervise the adherence by
operators to the QOS parameters.
The telecom services have been recognized the world-over as an important tool for socio-
economic development for a nation. It is one of the prime support services needed for
rapid growth and modernization of various sectors of the economy. Indian
telecommunication sector has undergone a major process of transformation through
significant policy reforms, particularly beginning with the announcement of NTP
(network time protocol) 1994 and was subsequently re-emphasized and carried forward
under NTP 1999. Driven by various policy initiatives, the Indian telecom sector
witnessed a complete transformation in the last decade. It has achieved a phenomenal
growth during the last few years and is poised to take a big leap in the future also.

Status of Telecom Sector

The Indian Telecommunications network with 621 million connections and 500 million
wireless connections (as on March 2010) is the third largest in the world. The sector is
growing at a speed of 45% during the recent years. This rapid growth is possible due to

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various proactive and positive decisions of the Government and contribution of both by
the public and the private sectors. The rapid strides in the telecom sector have been
facilitated by liberal policies of the Government that provides easy market access for
telecom equipment and a fair regulatory framework for offering telecom services to the
Indian consumers at affordable prices. Presently, all the telecom services have been
opened for private participation. The Government has taken following main initiatives for
the growth of the Telecom Sector:

LIMITATIONS

The mobile tariffs in the world’s cheapest telecom market are set to fall further by at least
20-25 per cent during the year, more so due to increasing number of telecom operators
and infrastructure overcapacity.

With local call rates at 33 paisa (BSNL) and STD rates at 50 paisa per minute (most
mobile operators), the country has the lowest telecom tariffs in the world.

To begin with, the industry is expecting the new licensees (including Loop Telecom,
Datacom Solutions and Unitech Wireless) to commence operations in this year itself.
This coupled with the expected expansion of operations of existing players like Aircel
Cellular, Idea Cellular, Tata Teleservices and Reliance Communications (RCom) will
have an impact on the mobile tariffs.

“Whenever new entrants commence operations in the country, there is a high chance of
reduction in tariffs as they come in with innovative strategies and prices, including
freebies. This will increase competitive pressure on other players who will have to launch
similar products to compete in the market. Moreover, apart from tariffs, the price
reduction would also be extended to handsets,” European handset major Meridian India
CEO Rajiv Khanna told Business Standard.

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Another reason is an expected overcapacity in towers. The Telecom Regulatory Authority

of India (TRAI) estimates that the country needs around 300,000 towers by 2010 to
support the massive 10 million monthly subscriber additions.

At present, the sector has around 2, 75,000 towers. Operators like Bharti Airtel, Idea
Cellular and Vodafone and independent tower companies like GTL Infrastructure and
Indus Towers are increasing capacity and the 300,000-mark will be crossed much before
the deadline, if not this year itself.

“The increase in the number of players will benefit the consumers in terms of newer
enriched applications, choice and affordability. The on-ground traffic is increasing, but
quality of traffic is not, clearly indicating that there is a need for more capacity. The
tower infrastructure availability is going at comfortable speed. The industry will have to
now think of ways and means of handling the increasing capacity proportionately, but
more resource effectively,” GTL Chief Operating Officer and director Charudatta Naik
said.

The recent slash in termination charges from 30 to 20 paisa for domestic calls, which the
operators have begun passing on to the subscribers, is also pulling tariffs down.
Termination charges are the charges paid by one operator to another for terminating the
calls on the latter’s network.

Moreover, the expected allocation of additional 2G spectrum and auction of 3G spectrum

will also lead to a further rate cut. “The new government will have to allocate 2G
spectrum to operators for additional expansion plans, while 3G auction will also take
place immediately after the government coming into power. While some players would
get 3G spectrum, others will slash prices to thwart competition,” a Mumbai-based analyst
said.

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However, the price reduction is not all that good. According to Idea Cellular Managing
Director Sanjeev Aga: “Indian companies are rolling our predatory prices without
conducting proper studies, unlike in the US or developed countries. Price reductions
coming in from desperate companies are anti-competition and these are not based on
economic sense, and in the long run this would be anti-consumer and anti-industry.”

In the short-term, it is the customer who will reap the benefits of the tariff fall.

In 1994, the Government announced the National Telecom Policy which defined certain
important objectives, including availability of telephone on demand, provision of world
class services at reasonable prices, improving India’s competitiveness in global market
and promoting exports, attractive FDI and stimulating domestic investment, ensuring
India’s emergence as major manufacturing / export base of telecom equipment and
universal availability of basic telecom services to all villages. It also announced a series
of specific targets to be achieved by 1997.

For more details, visit National Telecom Policy 1994

Telecom Regulatory Authority of India (TRAI)

The entry of private service providers brought with it the inevitable need for independent
regulation. The Telecom Regulatory Authority of India (TRAI) was, thus, established
with effect from 20th February 1997 by an Act of Parliament, called the Telecom
Regulatory Authority of India Act, 1997, to regulate telecom services, including
fixation/revision of tariffs for telecom services which were earlier vested in the Central
Government.

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TRAI’s mission is to create and nurture conditions for growth of telecommunications in

the country in manner and at a pace, which will enable India to play a leading role in
emerging global information society. One of the main objectives of TRAI is to provide a
fair and transparent policy environment, which promotes a level playing field and
facilitates fair competition. In pursuance of above objective TRAI has issued from time to
time a large number of regulations, orders and directives to deal with issues coming
before it and provided the required direction to the evolution of Indian telecom market
from a Government owned monopoly to a multi operator multi service open competitive
market. The directions, orders and regulations issued cover a wide range of subjects
including tariff, interconnection and quality of service as well as governance of the
Authority.

The TRAI Act was amended by an ordinance, effective from 24 January 2000,
establishing a Telecommunications Dispute Settlement and Appellate Tribunal (TDSAT)
to take over the adjudicatory and disputes functions from TRAI. TDSAT was set up to
adjudicate any dispute between a licensor and a licensee, between two or more service
providers, between a service provider and a group of consumers, and to hear and dispose
of appeals against any direction, decision or order of TRAI.

For more details, visit, http://www.trai.gov.in/ http://www.tdsat.nic.in/

New Telecom Policy 1999

The most important milestone and instrument of telecom reforms in India is the New
Telecom Policy 1999 (NTP 99). The New Telecom Policy, 1999 (NTP-99) was approved
on 26th March 1999, to become effective from 1st April 1999. NTP-99 laid down a clear
roadmap for future reforms, contemplating the opening up of all the segments of the
telecom sector for private sector participation. It clearly recognized the need for

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strengthening the regulatory regime as well as restructuring the departmental telecom

services to that of a public sector corporation so as to separate the licensing and policy
functions of the Government from that of being an operator. It also recognized the need
for resolving the prevailing problems faced by the operators so as to restore their
confidence and improve the investment climate.

Key features of the NTP 99 include:

· Strengthening of Regulator.

· National long distance services opened to private operators.

· International Long Distance Services opened to private sectors.

· Private telecom operators licensed on a revenue sharing basis, plus a one-time entry
fee. Resolution of problems of existing operators envisaged.
· Direct interconnectivity and sharing of network with other telecom operators within
the service area was permitted.

· Department of Telecommunication Services (DTS) corporatised in 2000.

· Spectrum Management made transparent and more efficient.

All the commitments made under NTP 99 have been fulfilled; each one of them, in letter
and spirit, some even ahead of schedule, and the reform process is now complete with all
the sectors in telecommunications opened for private competition.

For more details, visit New Telecom Policy 1999

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National Long Distance

National Long Distance opened for private participation. The Government announced on
13.08.2000 the guidelines for entry of private sector in National Long Distance Services
without any restriction on the number of operators. The DOT guidelines of license for the
National Long Distance operations were also issued.

Highlights - NLD Guidelines

· Unlimited entry for carrying both inter-circle and intra-circle calls.

· Total foreign equity (including equity of NRIs and international funding agencies)
must not exceed 74%. Promoters must have a combined net worth of Rs.25 million.

· Private operators will have to enter into an arrangement with fixed-service providers
within a circle for traffic between long-distance and short-distance charging centers.

· Seven years time frame set for rollout of network, spread over four phases. Any
shortfall in network coverage would result in encashment and forfeiture of bank
guarantee of that phase.

· Private operators to pay one-time entry fee of Rs.25 million plus a Financial Bank
Guarantee (FBG) of Rs.200 million. The revenue sharing agreement would be to the
extent of 6%.

· Private operators allowed to set up landing facilities that access submarine cables
and use excess bandwidth available.

· License period would be for 20 years and extendable by 10 years.

For more details, visit National Long Distance

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International Long Distance

In the field of international telephony, India had agreed under the GATS to review its
opening up in 2004. However, open competition in this sector was allowed with effect
from April 2002 itself. There is now no limit on the number of service providers in this
sector. The license for ILD service is issued initially for a period of 20 years, with
automatic extension of the license by a period of 5 years. The applicant company pays
one-time non-refundable entry fee of Rs.25 million plus a bank guarantee of Rs.250
million, which will be released on fulfillment of the roll out obligations. The annual
license fee including USO contribution is @ 6% of the Adjusted Gross Revenue and the
fee/royalty for the use of spectrum and possession of wireless telegraphy equipment are
payable separately. At present 24 ILD service providers (22 Private and 2 Public Sector
Undertaking) are there. As per current roll out obligations under ILD license, the licensee
undertakes to fulfill the minimum network roll out obligations for installing at least one
Gateway Switch having appropriate interconnections with at least one National Long
Distance service licensee. There is no bar in setting up of Point of Presence (PoP) or
Gateway switches in remaining location of Level I Tax’s. Preferably, these PoPs should
conform to Open Network Architecture (ONA) i.e. should be based on internationally
accepted standards to ensure seamless working with other Carrier’s Network.

For more details, visit International Long Distance

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