×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

DoT proposes tax incentive for winning 3G bidders

DoT proposes tax incentive for winning 3G bidders
Comment E-mail Print Share
First Published: Wed, Jul 01 2009. 11 22 PM IST
Updated: Wed, Jul 01 2009. 11 22 PM IST
New Delhi: The department of telecommunications, or DoT, has asked the Union finance ministry to allow the winning bidders in the forthcoming auction of spectrum for third generation, or 3G, phone services to treat their winning bid amounts as expenses over the 20-year tenure of the licence.
Click here to watch video
The spectrum bid, DoT has proposed, should be allowed to be set off in 20 equal annual instalments. If accepted by the government, this proposal means the bidders will potentially reduce tax outgo over their licence period. DoT, the country’s telecom policy administrator, expects to award a maximum of six slots of 3G spectrum wherever available.
A 3G service supports faster data downloads, allowing for faster Internet access on mobile phones or video-calling, as also better voice quality. Spectrum, or airwaves, a limited resource, is required to run these and other mobile phone services.
In the past, treatment of licence fee as an expense has been allowed for mobile phone service providers. But the scale is expected to be different now, with 3G spectrum bids in India—the world’s second largest and fastest growing telecom services market by customers—expected to run into billions of dollars paid upfront.
The upfront licence fee for mobile phone firms providing today’s second-generation or 2G services is just Rs1,651 crore. In addition, a percentage varying between 6% and 10% of revenues net of service tax and charges related to interconnection of phone networks is levied as licence fee. Also, an additional spectrum charge of 2-6% of revenues is levied.
Both levies can be set off as an expense for tax purposes.
The DoT proposal also covers what are called broadband wireless access or BWA services, expected to be auctioned along with 3G spectrum later this year. Minister of communications and information technology A. Raja said in May that he expected the auctions, delayed at least twice, to take place within this year.
“The money that is bid for 3G and BWA spectrum should be seen as a long-term asset and it should be amortized and then set off,” a senior DoT official said, asking he not be identified as he is not authorized to speak to the media. “The money that they pay for the spectrum will be amortized over the licence period and then set off so that they get the tax benefit from that and they can bid more.”
A second senior DoT official, requesting anonymity as well, confirmed the proposal.
T.V. Ramachandran, director general, Cellular Operators Association of India, the country’s primary lobby for mobile phone firms, said the DoT proposal was welcome and “it is a very good thing”.
But a tax expert said the impact on the financials of the 3G phone firm would perhaps be muted, and would not result in an upward bias on the bids. “I don’t think this will have a major impact on the bidding price. The reason being, even in the absence of this provision, there are certain general provisions in the Income-tax (I-T) Act whereby it may still be possible for the telecom operator to claim a tax break on this spectrum fee paid by them,” said Himanshu Parekh, executive director of tax practice at audit and consulting firm PricewaterhouseCoopers.
Intangible assets, for instance, he said, are eligible for depreciation at a higher rate of 25% by the reducing balance method, allowing firms to exhaust the entire expenditure within five or six years. “Under the amortization rule, the process is a lengthy affair, but it is more specific to the telecom sector,” Parekh said.
In a related proposal, DoT has asked the finance ministry that a tax-saving provision contained in section 80(I)a of the I-T Act be extended to new 2G telecom operators—the department awarded six such firms licences and spectrum last year—and those who win the 3G auction.
Phone firms have been eligible for tax benefits under this section for a period of 10 years, with a 100% exemption on taxable profits for five years and a 30% exemption for the next five. This benefit, which only applied to telecom operators who started operations on or before 31 March 2005, could be availed any time over 15 years from the start of the licence period.
The extension of the section 80(I)a incentive will be more beneficial than an equal setting off of spectrum fees over 20 years for phone firms since they typically make losses in the initial years of operations and will not be able to benefit from setting off the amount bid for spectrum against taxes.
Section 80(I)a aims to provide incentives for investment in capital-intensive infrastructure businesses such as power, telecom and special economic zones.
Comment E-mail Print Share
First Published: Wed, Jul 01 2009. 11 22 PM IST
More Topics: DoT | Tax | 3G Spectrum | Bidders | A. Raja |