Finance minister P Chidambaram yesterday announced further concessions for the telecom sector by allowing service companies to treat licence fees as revenue expenditure. The announcement "" which came a month after the government announced a package of incentives for the sector "" is expected to result in a minimal tax outgo for cellular and basic telecom companies.
The treatment of licence fees as revenue expenditure removes apprehensions among telecom companies about how the levies would be accounted on their balance sheets. Already telecom companies have been brought under the purview of Section 80IA which allows them a zero-tax outgo for the initial five assessment years. Further, the section allows them a 25 per cent deduction from profits for purposes of calculating taxes in the next five years of the project.
The five-year tax holiday and other tax benefits will accrue to the companies from April 1, 1996, according to the Finance Bill, 1997 tabled in Parliament yesterday. The amortisation of licence fees has been proposed in an amendment to Section 35 ABB in the Income Tax Act which will come into effect April 1, 1998. This amendment is in alignment with the current policies followed by state-owned Mahanagar Telephone Nigam Ltd and Videsh Sanchar Nigam Ltd which treat licence fees payable to the department of telecommunications (DoT) as revenue expenditure.
Another sop that the finance minister held for the capital intensive telecom sector was a reduction in import duties for telecom equipment from 25 per cent to 20 per cent. This reduction came along with an overall reduction in import duties for capital goods imports. Since the cost of equipment is between Rs 500-600 crore (for a cellular circle) over a three-year period and some Rs 1,500 crore for a basic circle, the import tariff reduction is expected to be substantial.
Similarly, a sop for the information technology sector also holds benefits for the telecom sector. Chidambaram announced a zero-duty on software imports, down from 10 per cent earlier. Since 'embedded' software account for as much as 20-30 per cent of telecom equipment costs, this is also expected to be substantial. Telecom PSUs MTNL and VSNL will also benefit from the hardware and software duty reductions.
Yet another fillip that the minister sought to give to cellular telecom services was a drop in the basic import duty on cellular handsets from 30 per cent to 20 per cent. Alongwith countervailing levies on the product, the effective duty will drop from 52 per cent to some 42 per cent, sources said. A $250 cellphone which would cost the consumer over Rs 14,000 earlier now is expected to be priced at some Rs 12,600.
The expenditure budget 1997-98 has set a plan target of Rs 10,916 crore in the next fiscal year for DoT. MTNL's next year investments have been pegged at Rs 1,518 crore up some 66 per cent from Rs 913 crore in fiscal 1996-97. VSNL's plan outlay has been hiked from Rs 598 crore to Rs 825 crore.
DoT's 1997-98 outlay marks 28 per cent increase over the previous year's revised estimate of Rs 8,474 crore. The budget estimate of 1996-97 was set at Rs 8,000 crore. In 1997-98 also, the telecom sector will have just Rs 7 crore budgetary support in a total outlay of Rs 13,554.29 crore, according to budget papers.
Sweet music to telecom companies
* Licence fees to be treated as revenue expenditure, to come into effect from April 1, 1998.
* Such expenditure can be amortised over the period of the licence; companies can set it against income for tax purposes
* Import duty on telecom equipment down from 25 to 20 per cent
* Zero duty on 'embedded' software that comes alongwith equipment
* Effective duty on cellular handset down from 52 per cent to 42 per cent
* Plan outlay for 1997-98 set at some Rs 13,550 crore; only Rs 7 crore budgetary support
