The Government has decided that telecom companies offering 3G services will not be allowed to claim tax breaks under Section 80 IA of the Income Tax Act. Benefits under Section 80 IA are extended to companies involved in infrastructure creation. In the telecom sector, existing operators are allowed to choose a block of 10 years (out of the first 15 years of operations) for availing themselves of the tax benefits. In the first five years of this block, they are entitled to 100 per cent exemption on taxable profit and for the remaining five years, they get a 30-per cent exemption. However, the Government has decided against extending the benefits to 3G players on the grounds that the proposed auction was for allocating spectrum, and not for any new licence. This will have a larger impact on new players compared with the existing ones who will continue to get the benefits on their existing 2G infrastructure.
Even those operators who got licences in 2008 will lose out as the tax break under Section 80 IA is available to only those players that started services before 2005.Therefore, even if a foreign player decides to partner with one of the new entrants, such as Videocon -owned Datacom, it will not get the tax benefit. Though the Department of Telecom had suggested extending the tax benefit to operators launching up to 2010, the Finance Ministry has not agreed to it.
At a disadvantage
Already, the auction rules for 3G are heavily loaded in favour of incumbent players. New operators have been asked to pay Rs 1,650 crore in addition to what they bid for 3G spectrum. Though incumbent players also had to pay the same amount when they acquired the unified access licence, they were given a start-up 2G spectrum of 4.4 Mhz. No such assurance has been given to new players.
The Government has also barred any operator from acquiring more than 5 Mhz spectrum in the auction. This again puts new players at a disadvantage as they may not have enough spectrum to offer both voice and data in that bandwidth. On the other hand, incumbent players already have between 4.4 Mhz and 10 Mhz of 2G spectrum for voice services.
The only advantage that the new players have been given is that they will not have to pay spectrum charges for the first year, whereas incumbent players have not got any moratorium.