B U D G E T A N A LY S I S

Budget 2012

The Wait Prolongs...

Industry leaders had expected this budget to spur growth that the telecom industry has deserved for so long; but it had to face disappointment yet again

he struggling telecom industry set its basic demands in purview of the governing bodies; but yet again got a big blow with Union Budget 2012-13 discarding the industrys demands. Waiting in high hopes, industry leaders had expected this budget to spur growth that the industry deserved for so long; yet faced only disappointment this year.

Union Budget 2012-13

Overall Pranab Mukherjees budget 201213 addressed 5 objectivesfocus on

domestic demand driven growth recovery; create condi ons for rapid revival of high growth in private investment; address supply bo lenecks in agriculture, energy, and tansport sectors, par cularly in coal, power, na onal highways, railways, and civil avia on. No tax relief/benefits have been granted to the telecom industry which keeps reeling under rising opera ng costs and deteriora ng margins. Moreover, the increase in service tax from 10% to 12% will further aect the growth of the industry as it is detrimental to the objec ves of rural penetra on and aordable rates for the consumers. The increased costs will eventually be borne by the consumers in the form of

higher charges for the services. The Cellular Operators Association of India (COAI) too has expressed disappointment on the Union Budget 2012-13 as it does not address critical issues related to the telecom as well as infrastructure sectors of the country. While industries like agriculture have received adequate support, the telecom sector has again been deprived of the much required provisions that would mo vate the industry to grow. However this years budget will s mulate growth for agriculture, banking, and m-payments industry with development of er-2, -3 markets. This will, in turn, enhance the adop on of mobility contribu ng to the overall growth of the economy. The introduc on of a cons tu onal amendment for GST is also a posi ve development. The budget with its thrust on accelerating overall GDP growth from 6.9% to 7.6% has shown some posi ve signs. The thrust given to areas like infrastructure development, skill development, encouragement

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of R&D, and the focus on helping SMEs has truly generated enough agreement. The con nuing uncertain business environment will be nega ve for investment and hence for growth as well. Equally important, given the current account decit, there is need to provide a strategic thrust on high value exports; this aspect has been totally ignored, reacts Nasscom.

The Budget in a Nutshell

n Increase of Service Tax to 12% n No tax relief/benets to the telecom industry n GSTN to become operational by August, 2012 n `5,000 crore venture fund for MSME sector n Issues of tax simplication, litigation have not been addressed n Exemption of mobile phone parts from basic custom duties

Tax Structure: Twisted and Moulded

In Budget 2012-13, the service tax has been raised from 10% to 12%. Pranab Mukherjee said that this increase is expected to yield addi onal revenue of `18,600 crore. However, the increase in service tax will lead to making the services costlier and aec ng protability of companies. Increase in service tax from 10-12% would increase cost of ownership of a mobile phone. This becomes all the more signicant for CDMA based mobile services which to a large extent services the telecom needs of customers who are at the bo om of the pyramid, comments Vsevolod Rozanov, president and CEO, MTS India. In 2010-11, the fiscal balance has deteriorated due to slippage in direct tax revenue and increased subsidies. The government is planning to fund subsidies to the extent that they can be borne by the economy without any adverse implica ons, said Pranab Mukherjee, union nance minister, government of India. In terms of tax reforms, the proposals for 2012-13 mark progress in the direc on of movement towards DTC and GST which will bring about uniformity in taxa on. The cascading eect of dividend distribuon tax has been removed; bene ng Indian MNC with operations in other parts of the world, says Minakshi Batra, director (India), IDA Ireland. There is no date or schedule for the Direct Tax Code implementa on and GST but the government is commi ed to bring these in the near future. For the IT industry the APA will be useful to ease transfer pricing li ga on, conrms Vikram Doshi, tax partner, KPMG.

n Government plans to raise `30,000 crore through disinvestment

The GST network (GSTN) will become opera onal by August 2012 and GSTN will implement a common PAN based registraon, returns ling, and payment processing for all states on a shared pla orm. On the industry front, setting up `5,000 crore venture fund for MSME sector is a welcome move, given that SMEs employ a sizeable popula on. We are also hoping that the GST rollout is on track for August this year, Naresh Wadhwa, president and country manager, Cisco India & Saarc explains. The proposed full exemp on on mobile phone parts may further make the smartphone aordable to a larger secon of the masses and basis the direct taxes, the increase in disposal income will further enhance the penetra on of smartphones, agrees Sunil Du , managing director, Research In Mo on India. Pradeep Jain, MD, Karbonn Mobiles, says, The exemption of mobile phone parts from basic custom duties which while bringing down the manufacturing cost of mobile phones will aid in deeper penetra on of mobile phone manufacturers into the untapped por ons of the Indian market. Growth impulse could be dampened by the 2% hike in excise duty and service tax. These hikes are expected to add to inflationary pressure and would work against budget expectations of lower ina on, suggests Ficci. In terms of disinvestment, the government plans to raise `30,000 crore through disinvestment from ` 14,000 crore achieved in 2011-12. We can expect

some disinvestment from the telecom ver cal also. The increase in excise duty and service tax will hurt growth and will likely cause ina onary pressures, insists Rajdeep Endow, managing director, Sapient India. Initiatives to bring down subsidies from the current 2.5% of GDP to 2% in 2012-13 and 1.75% in 2013-14 is welcoming. GST and DTC reforms are s ll not being aggressively pursued as expected by the industry and people. At present, companies engaged in certain businesses are eligible for a tax deduc on of 200% on certain expenditure incurred by them on an in-house research and development facility. This deduc on was slated to expire on March 31, 2012. It is proposed in the Union Budget 2012 to extend this deduc on by another period of 5 years.The industry had demanded this benet given that innova on has become an impera ve in todays economy without which the industry will not remain competitive. This is a welcome move especially given that implementa on of Direct Taxes Code is now delayed. The above proposals dovetail with the government objec ve of ensuring that R&D is given enough emphasis, given Indias innova on standing vis--vis the rest of the world. While the fact that corporate tax not being nkered with is probably the only source of joy for private industry in general, the nance minister has been consistent with his social inclusion agenda with the rise in alloca ons for several key schemes including rural sanita on, water

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and educa on, Anil Valluri, president, NetApp India Marke ng & Services adds.

Aadhaar on the Move!

To decrease subsidies, the government will be dependent on Aadhaar in a big way, be it fer lizer, kerosene, and LPG subsidy. The budget also proposed that government eort now will be directed towards be er targe ng and leakage proof delivery of the subsidies. Rajesh Janey, president, EMC India & Saarc says,The decision to increase investment in Aadhaar and leverage technology more in larger service delivery ini a ves will also provide impetus to the domes c IT sector. The finance minister further announced governments focus on leakage proof delivery of subsidies in the wake of which, a mobile based Fer lizer Management System, designed to provide end-to-end informa on on movement of fer lizers and subsidies will be rolled out na on-wide during 2012. The provision of mobile tracking for fer lizer subsidy also looks to be favorable. But apart from that, there are no major takeaways for the industry. Some of the key areas of concern for the industry, like skills development have not received any major focus, insists Partha Iyengar, vice president, dis nguished analyst, and regional research director, Gartner India. The Union Budget 2012-13 announced governments commitment to the enactment of a public procurement legisla on to enhance condence in public procurement and to ensure transparency and eciency in the process. The focus on bringing transparency in public procurement will result in increased spending on IT by the government. The industry had not expected any big change in the tax regime, says V Balakrishnan, chief nancial ocer, Infosys. However the industry requested some clarity and certainty on the applica on of tax laws, he further adds. The Bill in this regard is to be introduced in the budget session of the parliament.

Some initiatives should have been announced for the promotion of the domestic Electronics Design and Manufacturing (ESDM) industry in this Budget
Infrastructure and Manufacturing: At the Receiving End
Infrastructure funding, including that for cellular towers, Op cal Fiber Cables (OFC) and cables have been provisioned to work through Gap funding which seems posive as it is expected to bring down the opera ng capex considerably. However there s ll remained huge room for more to be done. PVG Menon, president, India Semiconductor Associa on (ISA) says, We would have liked to see some ini a ves being announced for the promo on of the domes c Electronics Design and Manufacturing (ESDM) industry, which has a poten al to grow to $400 bn by year 2020. We are also looking forward to the nal policy as well as implementa on details

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of the new Na onal Electronics Policy as well as the Na onal Telecom Policy, as related to ESDM sector. With excise duty increase, the required s mulus for growth has been curtailed and would be ina onary. This puts pressure on the already slow manufacturing sector, says Sandeep Nair, president and MD, Emerson Network Power. The 12th Plan period announced in the Union Budget promises `50 lakh crore investment in infrastructure with 50% private par cipa on but the implementa on would s ll remain a major challenge. We had rested high hopes on this budget expec ng that the government would now create a manufacturing sector friendly environment by addressing the scal disadvantages the sector is suering from. This budget would not lead to any growth of the manufacturing sector or contribute anything signicant to the economic growth of the country, Ashok Aggarwal, director general, TEMA. Ficci had expected and recommended that the budget would include measures for promo ng investment led growth. This was specially requested in the context of ongoing slowdown of economic growth which could be lower than 6.9% in 2011-12. The nominal growth rate of GDP is expected to be 14% for 2012-13. This translates into a 6.5% ina on rate, assuming a 7.6% GDP projec on in the next scal. It is not clear if the higher growth rate would see a strong revival of the manufacturing sector. If we see, Budget 2012 is disappoin ng on various counts, there is no focus on pu ng the economy on a high growth trajectory; scal decit reduc on is through higher taxa on, rather than expenditure management; there is no roadmap on implementa on of DTC and GST; and also issues of tax simplica on, li ga on have not been addressed. The budget, having served yet another disappointment to the industry, in turn will result in the laggard growth for yet another year.
Akanksha Singh akankshas@cybermedia.co.in

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Wherever you go... our Tax Follows

The telecom industry seems to be undone by a budget that met no expectations, and the industry was left longing for much more

or an economy reeling under inflationary pressures and a rising scal decit, the Union Budget 2012-13Pranab Mukherjees 7th budgetwas keenly awaited by the Indian business and foreign investors alike, largely to see whether the nance minister chalks out a credible path for reforms process, thereby escala ng growth and investor condence. Amidst the expecta ons of mul ple sectors of the industry, the budget was expected to provide impetus to the telecommunica on sector, being the prime driver for the economical growth of the country. However when Mukherjee quoted Hamlet in saying that he needed to be cruel only to be kind, it seemed to be true for the telecom sector as no signi-

cant policy announcements were made for this sector, except inclusion of xed telecom network and telecom tower infrastructure for viability gap funding. This le the industry with a set of unfullled expecta ons.

The Debate
On the direct tax front, while the telecom players were expec ng some incen ve in terms of extension of tax holiday benets to 3G and broadband internet sector and ra onaliza on of certain tax withholding provisions, which have signicantly plagued the telecom players in India, the proposals outlined by Mukherjee have been a signicant let down and have in fact surprised the industry. One of the biggest surprises has been the retrospec ve amendment a empt-

ing to tax indirect transfer of shares by way of retrospec ve inser on with eect from April 1, 1962, of deeming c on that share or interest in a company or en ty registered or incorporated outside India shall be situated in India, if the share or interest directly or indirectly derives its value substan ally from the assets located in India. The proposal to tax indirect transfers unsettles the positions settled by the Apex Court recently in the landmark case of Vodafone and the debate will again knock the doors of the court. The proposal makes the relief granted by the Apex Court to be very short lived, with taxability of various similar transac ons expected to come in limelight once again which was presumably se led by the principles laid down in the case of Vodafone.

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Major Changes
The budget 2012 also seeks to bring in major changes regarding royalty taxa on and eec vely a empts to neutralize various favorable court rulings on this issue. For an industry already reeling under margin pressure, addi onal tax cost on this account can increase the margin pressure. The budget proposes to amend the denion of royalty retrospec vely from June 1, 1976, to include considera on for transfer of all or any right for use, or right to use computer so ware (including gran ng of a license) to be in the nature of royalty, irrespec ve of the medium through which such right is transferred. Addi onally, the term process in the royalty deni on has been dened to include transmission by satellite (including up-linking, amplica on, conversion for down-linking of any signal), cable, op c ber, or by any other similar technology, whether or not such process is secret. These proposals could lead to characteriza on of payments inter alia towards leased line, inter-connect charges, etc, as royalty under the domes c income tax law. These amendments can put significant cash flow pressure on the telecom equipment vendor and other cons tuents of telecom industry who are already operating at negligible or no margin. This coupled with proposed amendment to hinder issue of refunds ll the audit is completed by the income tax department can very adversely impact the business. With pressure moun ng on Mukherjee to check tax evasion and with a view to address aggressive tax planning and codify doctrine of substance over form, General Anti-Avoidance Regulations (GAAR) has been introduced. Empowered by these provisions, revenue authori es can declare an arrangement entered into by a tax payer as an impermissible avoidance arrangement and determine tax consequences as appropriate. Further, extension of transfer pricing regula ons to specied domes c transac ons exceeding the prescribed value entered into related par es or related undertakings will come with increased compliance for companies with mul ple

For an industry already reeling under margin pressure, additional tax cost on this account can really hurt
numbers of group en es or units within the same company. However what comes as a relief is introduc on of advance pricing agreement regula ons, which is expected to oer be er assurance on transfer pricing methods and certainty and unanimity of approach, as against high pitched and at mes arbitrary transfer pricing adjustments being made currently. On the indirect tax front, signicant amendments have been proposed with the 2-fold objec ve of genera ng more revenue and moving closer towards the GST regime. Mukherjee in his budget speech announced that the structure of GST network has been approved by the Empowered Commi ee of State Finance Ministers and that it is expected to be opera onal by August 2012. The amendments made by the budget is expected to addi onally mop up somewhere around `40,000 crore. While the standard rates for excise duty and service tax have been raised from 10% to 12%, the custom duty rate has been maintained at 10%. The telecom sector has something to cheer for in the wake of the fact that the concessional rate of excise duty of 2%, without cenvat credit is being extended to parts, components, and specied accessories, viz, battery chargers, PC connectivity cables, memory cards, and hands-free headphones of mobile phones.

Concept of Negative List

The concept of nega ve list has been introduced which replaces the exis ng regime of levying service tax on specically dened 119 taxable services. This

would result in widening of tax base and consequently, will create an addi onal ou low of working capital on procurement of services. This coupled with the fact that no changes in cenvat scheme has been proposed, may lead to blockage of input taxes paid since credit will not be available. Telecommunica on services con nue to be taxed. Introduc on of nega ve list shall result in addi onal levy of service tax on inter-operator barter of services which are presently not being taxed. Services provided by non-telegraph authori es like out roaming and IPLC services and resellers of interna onal SIM card, shall also become taxable. Addi onally, exis ng export and import rules are proposed to be replaced by Place of Supply Rules (POSR). The rules would prescribe parameters for a service to qualify as export and import. Dra POSR proposes that in case of telecommunica on services provided to subscribers, the place of provision of service shall be the loca on of service provider. As a welcome step, the government has made amendments simplifying procedure for claiming refund of unu lized credit towards export of service and now there may not be more requirements for providing co-rela on of input services with the output services. In order to implement a tax structure based on a nega ve list of services the government is also expected to place a dra of supply rules for public debate. This would also replace the exis ng export and import rules. The Union Budget 2012-13 portrays a sorry tale of promise vs performance. If Mukherjees own words are something to go by, then his saying that I know that mere words are not enough shall summarize what the budget had in store for the industry. All said and done, the telecom industry seems to be undone by a budget that was devoid of all expecta ons being met and industrialists and investors le longing for much more.
Garima Pande The author is tax partner, telecom practice, Ernst & Young vadmail@cybermedia.co.in

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