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PROJECT REPORT ON INCOME TAX : ADVANTAGE & DISADVANTAGES TO TELECOM SECTOR IN INDIA

SUBMITTED TO: MRS. RANJANI MATTA SUBMITTED BY: AAKANKSHA PRASAD JAYA SARPAL MANISHA GUPTA SACHIN GUPTA SHALINI MAHAWAR SONI JADON TANVI SAHOO

thus providing ample growth opportunity. impacting players' earnings profile. The industry expects clarity on tax treatment of 3G spectrum payment. it still stands at an all India penetration level of ~60%. But high level of regulatory uncertainty (recommendations/ proposals relating to one time excess spectrum charge. Bharti and Tata have already started) but the traction generated by it is still to be seen. INDUSTRY EXPECTATIONS y The industry demands 100 % tax exemption under Sec. With the completion of the 3G auction process and stabilizing competition. To extend Income Tax benefits under Section 80-IA to Independent Infrastructure Service Providers. Mobile number portability could affect the subscription figures of some companies but established player may not feel the pinch. high payments towards license renewal fee) coupled with spectrum shortage still plague the industry. Granting Infrastructure status to Independent Telecom Infrastructure Providers as a separate entry u/s 80-IA (4). y y y y y y . y Re-introduction of the tax holiday benefits under Section 80IA of the I-T Act to operators similar to provision that exempted operators commencing services prior to 2005. Providing tax breaks to telecom infrastructure service providers. increasing rural penetration and data services offers immense potential going forward. 80IA from current five years to extend exemption to 10 years. Currently with ~ 750 million subscribers. and rural penetration of as low as ~30%. The industry expects tax holiday benefits for M&A which are currently available in the form of tax benefits u/s 80 IA to continue In order to encourage industry consolidation. as tax benefits shall improve financial viability of mergers. Moreover. With this the sector has become hyper competitive market with ~12-13 players as compared to ~3-4 in most other developed markets. especially with regards to recent 2G pricing and license renewal fees. recent regulator recommendation has stimulated some uncertainty in the sector. Thus is expected to witness consolidation in near term.ABOUT TELECOM INDUSTRY The telecom (wireless) industry has grown by leaps and bounds during the past few years to become one of the leading mobile markets on the global map. we believe the domestic environment remains strong. No import duty to be imposed on imported mobile handsets. Companies are expected to roll out 3G services (RCOM. Clarity on MAT credit available under Section 115JAA of the I-T Act would continue to be available in case of merger/acquisition. However. Of late the sector had witnessed high competition.

given the capital intensive nature of the sector. in turn proving to be positive for the telecom sector. The government is expected to impose import duty on imported mobile handsets to encourage the domestic production. We expect relaxation in the taxation norms to telecom service providers and telecom infrastructure companies. which is currently reeling under pricing pressures and regulatory challenges and also provide a boost to the sector due to long gestation period. which would boost disposable income levels and spur overall consumption. we do not expect the government to go ahead with this measure. to provide depreciation claim on upfront 3G spectrum fee.y The industry expects effective deployment of USO (Universal service obligation) fund to ensure speedy roll out of telecom infrastructure in rural areas to increase rural penetration. The tax exemption u/s 80 IA would be favorable for the sector. However. tax benefits provided u/s 80 IA would improve the financial viability of the merger. Industry expectation of reduction in service tax in the broadband segment will immensely aid penetration of broadband in Tier II and Tier III cities. The budget could announce indirect incentives for the sector by reducing the duty on capital/equipment imports or packages. Industry expects reduction in service tax in the broadband segment. This move would be positive for all telecom operators. y ANALYST EXPECTATIONS y In order to encourage consolidation in the highly competitive telecom industry. y y y y y y . Amendments in the Income tax law. which stands at less than 20 % currently.

Hence. BENEFITS:  The overall objective of the Government behind introduction of section 40(a)(ia) is to ensure avoidance of leakage of tax revenue. As a step further towards expansion of telecom service and spread of Mobile Broadband.DIRECT TAX: ADVANTAGES & DISADVANTAGES  Auction of Additional Spectrum in the Financial Year 2011 ± 2012.  The said clarification / amendment will provide certainty to the telecom operators about the treatment of the expenditure and will help in mitigating avoidable litigation on these issues.  The existing provisions of section 43A does not provide guidance on tax treatment of exchange fluctuation on ECB¶s arising on account of increase/reduction in liability incurred for payment of 3G spectrum fee. the Government of India. in case of failure to deduct tax at source as required by the law. the Government recently auctioned 3G spectrum. which involve high-end data offerings on mobiles. The same has also been allocated and the GSM industry is now gearing up to launch Third Generation (3G) services and Mobile broadband in the country.  The above amendments should be made applicable effective from FY 10-11.1GHz band (commonly known as the 3G spectrum) in various telecom service areas in India by means of an auction. However. it is not necessary to penalize the payer of income by disallowing the corresponding expenses.  3G Spectrum fee payment: Recently. By ensuring that the recipient of income has paid tax on the income earned by it. this provision doesn¶t take congnisance of provisions of section 191 of the IT Act which mandates payment of tax by the recipient of income in case of failure to deduct tax at source. the Government¶s objective is fulfilled and hence. through the Department of Telecommunications (µDoT¶). has allotted the rights to use certain specified radio spectrum frequencies in the 2. By way of the auction. inclusion of proceeds from auction of additional spectrum in the budgetary estimates: The telecom sector has played a vital role in the growth of the Indian economy and has emerged as the prime engine of economic growth.).  Disallowance under section 40(a)(ia): The Government introduced section 40(a)(ia) of the IT Act with an intention to increase the tax compliance. the expense gets disallowed while computing taxable income. BENEFITS:  Telecom operators have made significant investment for 3G business and the above amendments will ensure that proper tax deduction is conferred to the telecom operators in respect of such expenditure.770 crore (approx. As per this section. specific amendment is necessitated in the IT Act. . 3G slots across 22 telecom circles in India have been allotted to 8 different telecom operators for a total auction price of Rs 66.

Section 250(6A) of the IT Act enables the Commissioner (Appeals) to dispose of the appeal. where it is possible. This amendment will also ensure the genuine tax payer is not subjected to financial hardship in cases where the Government recovers tax from the recipient of the income. BENEFITS:  Many of these low end subscribers and subscribers in the rural areas do not have a PAN number and the same acts as a hindrance towards spread of service. The industry¶s concern arises from the recent approach of the tax authorities in certain cases where. plumbers.  TDS on margins of market intermediaries in the telecom sector: It is industry practice to enter into an arrangement with the pre-paid distributors on ³Principal to Principal´ basis. tax office generally recovers 25% to 50% of the tax demand which gets locked till the disposal of appeal by the Commissioner (Appeals). it is pertinent to note that many of these low-end subscribers like.  Time frame for disposal of appeals by Commissioner of Income Tax (Appeals): Under the IT Act. the telecom operator should deduct tax at source under section 194H of the Income-tax Act. the wireless segment forms almost 91% of the market share and the total wireless subscriber base is 687 mn subscribers. A 1% withholding rate would be representative of the actual tax liability of the distributor. Out of which. BENEFITS:  This amendment will fasten the process for disposal of appeals. it has been alleged that the difference between the Maximum Retail Price (MRP) of the prepaid talktime and the price at which it is made available by the telecom operator to the distributor qualifies as commission. In this regard.  This amendment should be made applicable with retrospective effect from 1st April 2005.  In the telecom industry. within a period of one year from the end of the financial year in which such appeal is filed.  This amendment will also reduce financial hardship on the tax payer since after passing the assessment order.  Requirement of PAN/ Form 60/61: The total number of telephone connections in the country has reached 723 million as on end September 2010. . BENEFITS:  It will eliminate litigation between the telecom operators and the tax authorities. despite there being a ³Principal to Principal´ arrangement between the telecom operator and the distributor. 1961. electrician. the tax payer is entitled to prefer appeal before the Commissioner of Income Tax (Appeals) against the tax assessment order. It is being alleged that the relationship between the telecom operator and the distributor is that of a principal and agent and accordingly. margins earned by the distributors are very low and the distributors sustain only on account of volumes.

especially when a corresponding incentives under section 10(23G) was available sometime back directly to the Financial Institutions and the same has been withdrawn since 01. the expansion by the telecom operators by way of acquisitions is likely to become tax inefficient. BENEFITS:  With the slowdown in economy.  Because of the above step.  This would greatly enhance viability of cellular projects and would thus go a long way in enabling companies to achieve financial closure. the Government would not only derive benefits from higher tax revenues but also from the resultant economic growth.  Section 80-IA . This also creates administrative problems for the service providers and in certain cases it may lead to these low-end and rural subscribers from being deprived of affordable mobile telecom services. . industrial parks and special economic zones or generation. ADVERSE IMPACT:  The above step could result in confusion and disputes on reorganization of telecom companies in the future.2007. including gas pipelines and storage facilities being an integral part of the network.  It will help in providing level playing field for all telecom operators who have been issued licenses by the Government at different times from 1994 onwards till date. etc. The requirement of quoting PAN number or the need to submit a declaration in Form 60/61 as per the rule 114 B of the Income Tax Act becomes an inhibitor/hurdle for spread of service to these strata of the society. operation and maintenance of infrastructure facility. and similar benefit is proposed for laying and operating a cross-country natural gas distribution network.vegetable vendors are NOT income tax assesses. the new operators are finding it difficult to achieve financial closure in the absence of this benefit.  It cannot be denied in any way that the Government has not been benefitted whether directly or indirectly by the mergers and amalgamations that have taken place in the Industry. distribution or transmission of power. Inserting a sun-set clause to the provision would act as a retrograde step in which even the benefit that would have accrued to the Government would also be deprived.to companies undergoing reorganisation after 31 March 2007: Section 80-IA provide for 100% deduction for ten years in respect of profits and gains of certain undertakings or enterprises engaged in the business of development.04.  As the projects become viable and the cellular industry grows.