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Telecommunications firms urge duty cuts in budget

Telecommunications firms have asked the government to extend tax breaks and cut import duties to give a boost to the fledgling industry in this month's federal budget, officials say.

Finance Minister Yashwant Sinha announces the budget for 2001/2002 (April-March) on February 28.

"We have asked that excise duty on all telecom equipment be cut to eight per cent from 16 now," S C Khanna, secretary-general of the Association of Basic Telephone Operators, said.

Khanna added that his association, which represents fixed line telephone firms, had also asked the government to extend a tax holiday to new fixed line firms until 2005.

"This benefit, under which we don't have to pay taxes, was allowed only up to March 2000. We have now asked that this be extended up to 2005," he said.

India's fixed line market, dominated by state-run Mahanagar Telephone Nigam Ltd (MTNL) and Bharat Sanchar Nigam Ltd (BSNL), is only now seeing interest from private firms after the government relaxed entry rules into the business.

The government last month allowed fixed line firms unrestricted entry, replacing an earlier rule that forbade more than one firm in each zone besides an existing state-run player.

The new rules have triggered a rush of applications from private firms -- the government has so far received 122 applications from private telecom groups to enter the business.

Industry officials say lower equipment costs and extended tax breaks would help the industry get off the ground quickly.

India's telecommunications business needs to grow rapidly if the country is to meet a government target of increasing the number of phones from around three per hundred people now to seven per hundred by 2005 and 15 per hundred by 2015.

An analyst at a local brokerage said he expected the import duty on optic fibre cable to be cut to five per cent from 15 given the government's priority to improve bandwidth availability.

CHEAPER HANDSETS

Cellular telephone firms on their part have asked the government for lower duties on cellular handsets to bridge the gap between official imports and those smuggled into the country.

The government last year lowered the import duty on mobile handsets to five per cent from 25, but it still imposes a countervailing duty of 16 per cent to protect local manufacturers.

"We have asked that the countervailing duty be scrapped as, at current duties, there is still an entry barrier for customers. Besides there is no need to protect local manufacturers as there are none," said T V Ramachandran, secretary general of the Cellular Operators Association of India.

He said the higher duties had resulted in a booming grey market for mobile handsets and boosted smuggling.

"The government can keep the customs duty at five per cent and just scrap the countervailing duty. It can always reimpose it whenever there are local manufacturers," Ramachandran said.

Smuggled handsets account for over 50 per cent of cellular handsets in the country.

Cellular operators have also asked for zero duties on telecom software and lower duties on microwave equipment.

The cellular market grew 94 per cent in calendar year 2000 to 3.11 million subscribers, helped by cheaper mobile handset prices and falling tariffs.

The analyst said the government might meet cellular operators half way, without ceding to all their demands.

"It has to seek a balance between the need for more investment in the sector and that for more revenues to balance the budget," he said.

BROADER POLICY

Analysts said the government may also address broader policy issues, for example overcoming its reluctance to lift a 49 per cent sectoral cap on foreign investment in the telecom sector. Industry leaders want this cap to be lifted.

Domestic newspapers said some federal ministers wanted the cap lifted, but faced opposition from the telecommunications ministry.

Analysts believe the government's hand may well be forced by its plans to privatise Videsh Sanchar Nigam Ltd, the overseas telephony provider and India's first and largest Internet service provider.

Earlier this month, it announced plans to sell 25 per cent of its stake in the New York Stock Exchange (NYSE)-listed VSNL to strategic investors. It now owns a 52.97 per cent stake.

"They will have to do something. With 30 per cent of VSNL's equity held as ADRs (American Depositary Receipts), a 25 per cent stake sale, unless done to local firm, will take the Indian holding in the company below 49 per cent," one analyst said.

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