Post Budget Sector Analysis

Budget Proposal

• Developers and suppliers of content for use in telecom to be brought under the purview of service tax - No
• Department of Telecommunication asked to constitute a committee to study the present structure of levies and make suitable recommendations to the government with regards to the applicability of a unified and single levy on the revenue - Yes
• Nil additional duty of customs, on parts, components and accessories of mobile handsets including cell phones, being extended upto 30th June 2009 - No
• Hike in dividend distribution tax from 12.5% to 15% on dividends distributed by the companies - No
• Additional cess of 1% on all taxes to fund secondary education and higher education - No

Sector Impact

• With developers and suppliers of content being taxed, the cost of content is set to rise as also the cost of the value added services (VAS) that are rich in content
• If the proposed committee approves the case of single levy for the telecom sector it will be a big positive for the sector (reduction in tax levels) as also for the government (lowering of administrative burden)

Sector Outlook

The budget has been more or less neutral towards the telecom sector. The levy of service tax on providers of content to the telecom sector may in the short run stymie the off take of value added services but this is not a major concern at the moment as the companies are more focused on organic growth and subscriber congregation. The finance minister has acknowledged the demands of the telecom sector to have a single levy instead of the current multiple levies and has also proposed to the Department of Telecommunication to set up a committee to look into the present structure and make suitable regards to the government with regards to the same. If the proposal of single levy goes through, it could usher in respite for the telecom service providers. With the government envisioning a telecom subscriber base of 650 m by 2012 in the economic survey yesterday it looks like the government is going to put its best foot forward in helping the sector to thrive.

Company Impact

• Currently none of the major telecom companies are paying out dividend owing to their turbo charged expansion plans that require them to entail huge capex. As such, the increase in dividend distribution tax is not expected to impact the companies in the near future.
• All companies will have to bear the burden of additional 1% cess for higher education
• Reliance Communication carries out the content development in-house. So, despite it having to bear the load so service tax it will be in a position to offer value added services at more competitive rates as opposed to its peers due the absence of revenue sharing agreements that its peers have with the content providers