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Telecom: Blessed product, sinned taxes! - Views on News from Equitymaster
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  • Mar 9, 2007

    Telecom: Blessed product, sinned taxes!

    The month of February 2007 saw the completion of one of the biggest deals to have been done in the Indian telecom market. Vodafone paid a whopping US$ 12 bn to acquire HTIL’s 67% stake in Hutch-Essar to gain a foothold in the world’s fastest growing telecom market. The deal was done at an EV per subscriber of US$ 815, indicating the premium that Indian telecom companies have come to command in just a little over a decade’s existence. As a matter of fact, the highest valuation so far in the Indian telecom was for the 10% stake that Vodafone had acquired in Bharti Airtel in October 2005.

    Rearview mirror
    It was not a very long time ago when PSU majors, BSNL and MTNL, dominated the Indian telecom sector. The liberalisation of the sector that began in 1991, which saw the opening up of mobile service participation to private players. There has been no looking back since then. The implementation of the National Telecom Policy in 1999 resulted in open competition, which led to lower tariffs, increased coverage across cities and towns and a robust growth in subscriber base, which continues unabated. The culmination of this sustained growth is that today India is the 5th largest telecom market, 4th largest wireless market and has maximum net adds per month throughout the world (Source: COAI).

    Importance of telecommunication services
    Telephones, by their very nature of providing connectivity, have played an important role in the development of economies. This is because better connectivity leads to increased commerce and trade. As a matter of fact, as per a study carried out by Ovum, an international telecom research agency, it has been noted that a 1% increase in teledensity leads to a 3% increase in the rate of growth of GDP. In India, the sector has witnessed a sea change from the time when one had to wait for a telephone connection to days where one has calls ‘waiting’ on his/her phone.

    Telecom sector is also one of the biggest job creators in the country. Apart from providing direct employment to people in the form of administrative jobs, network maintenance jobs and marketing jobs, it also creates a lot of indirect employment in the form of building shelters, laying the optic fiber cables, and setting up of towers. It is estimated that the sector generates about 8.2 m jobs either directly or indirectly.

    A whopping Rs 330 bn is contributed to the national exchequer by the sector in the form of regulatory charges, service tax, license fees, and spectrum charges (COAI). On a per subscriber basis, this works out to be roughly Rs 1,600 per annum.

    The way forward
    The Indian telecom market is headed for some exciting times ahead. We will not reiterate what the penetration levels are or what is the subscription target set by the Ministry of Telecommunication. We will instead take a look at what needs to be done in order to make these possible.

    There is a pressing need to lower the levies imposed on the telecom sector as high levies will mean lower return on capital which in turn will have a detrimental effect on the expansion plans of companies. The total regulatory charges as borne by the Indian telecom companies is in the range of 17% to 26% + GST (Goods and Service tax) as against 3.5% for Chinese companies. Expectedly, the return on capital employed for the Chinese telecom industry is 22.9% as against India’s 7.9% (Source: COAI). What is more is that since the telecom industry’s revenues have been growing at a compounded rate of 58.5% (between March 2004 and March 2006) thus even a 50% cut in the levies is not expected to hamper revenues for the government.

    As far as the subscriber growth is concerned, India is sure to witness some exciting times ahead. Vodafone that has recently entered the Indian telecom scene with a majority stake in Hutch-Essar is targeting an addition of 100 m subscribers over the next five years and looks forward to having the highest market share of 25% by the end of this period. Its peers are not the ones to be left behind either with Bharti Airtel, which already has the largest market share upping its ante by rolling out fast into more and more towns and villages in a bid to increase its presence and gain the first movers advantage. Even the CDMA major, Reliance Communications has announced plans for an aggressive foray into the GSM space. Even as we write, the company is reviewing the biggest tender ever floated for GSM lines (100 m), not to mention the US$ 2.5 bn capex that the company has lined up for the coming financial year. Another key player, Idea Cellular has also lined up plans to roll out services in the remaining circles, with an immediate plan to launch services in Mumbai.

    So the slugfest for subscriber additions is going to take on a whole new meaning with the merger backdrop not looking too attractive as the smaller players that remain have a very small subscriber base and a limited presence, which makes them unattractive targets. While the larger telecom companies will leave no stone unturned, a lot of their plans are actually hinged on the timely and adequate availability of spectrum. Already the government is behind schedule in releasing additional spectrum for 2G. The rollout of 3G services seems a while away.

    The Indian telecom sector is not just the fastest growing one in the world. It also contributes to the national exchequer in a big way and provides additional benefits of employment generation and growth of commerce and trade. However, the levies with which it is burdened are holding the sector back from it attaining its true potential, as decreased tariffs will only mean more usage. To conclude in the words of Charles Kenney “it is a case of sinned taxes on blessed product”. The government, recognising the need of the industry to lower the levies on telecom services, is considering the feasibility of a single levy on the industry players. This shall ease off the tax burden on the telecom sector, the benefits of which will be passed on to subscribers in terms of even lower tariffs. Also, the government’s administrative expenses shall stand reduced to that account



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