By Ishita Misra
Since the entry of the Mukesh Ambani-led company Reliance Jio, the financial health of the telecom sector has been plummeting. The sector is already in roughly Rs 4.9 lakh crore worth of debt. Despite the sector’s bleak outlook, the Goods and Services Tax (GST) Council has decided that telecom services will have a tax rate of 18 percent, up from the current 15 percent service tax.
Telcos believe that the increase in tax will worsen the financial health of the sector and are seeking government intervention to lower the tax rate. They demand that the GST on telecom services be set at 5 percentequal to the tax applicable to essential servicesinstead of the 18 percent slab.
The sector’s struggle with tariffs
The Indian telecom sector is the second largest and fastest growing telecom sector in the world. There has been a significant improvement in areas such as rising minutes of usage (MOUs), increasing teledensity, double-digit growth in Internet subscribers and increasing data consumption levels. However, the sector has yet to reach its full potential in rural areas, where telecom density stands at roughly 50 percent. The low rural telecom density is mostly due to a lack of adequate telecom infrastructure in semi-rural and rural areas.
The sector is one of the most competitive in the country. This inevitably creates thin operating margins and competitive pricing. Reliance Jio sparked a complete transformation after it entered the market last September. In an attempt to compete with Reliance, most operators have considerably lowered their tariffs. Consequently, tariffs for data usage have hit rock-bottom levels for all operators. Additionally, voice calls are now free for not just Reliance Jio customers but also most post-paid customers of Airtel, Vodafone India, and Idea Cellular. The fall in tariffs has led to the operators facing a tremendous drop in profits and the resultant poor financial health of the sector.
The demands of the industry
At present, there is a 15% tax payable on telecom services. Any further increase in the rate of tax under a GST regime will have a direct impact on the costs of services and billing to the Telecom Service Providers (TSPs). It will lead to an increase in the costs which will either be passed on to the consumers or the TSPs. Either way, it will be crippling for the telecom industry. Rising customer costs will be detrimental to the expansion of the sector in the rural areas. Conversely, if the TPSs bear the tax, it will add to their massive debts. The increase in tax will also impact infrastructure rollout in semi-urban and rural areas, a region which has already lagged behind in connectivity due to inadequate infrastructure.
The inter-ministerial group has planned to meet senior executives of TPS and discuss measures to reduce the financial stress in the telecom sector. Meanwhile, the industry has listed their demands to improve its financial health. These demands include that the GST be set at 5 percent, increased availability of input credit on telecom towers, distribution chain of telcos kept out of GST, and the exclusion of credit reversal under GST.
Is lower better?
A lower GST rate can improve the financial stress on the sector to a large extent. Lower GST rates will result in lower prices for the consumers and allow the industry to expand in rural areas. With a bulk of the rural population still not subscribing to telecommunication, the expansion could lead to a tremendous jump in the number of subscribers and a resultant increase in profits. The expansion in rural areas will also have a lot of positive effects on the economy as it will boost initiatives such as Digital Literacy Scheme for rural India, launching of online payment banks, Digital India and Make In India.
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