NEW DELHI: For Finance Minister P. Chidambaram, the telecom sector became a new source of revenue two budgets ago, thanks to the service tax and the education cess.

Telephone subscribers may not realise it but they pay 10.2 per cent to the Central exchequer on every call made or a SIM card purchased. The quiet rise in the importance of the telecom sector to Central finances has gone unnoticed.

In fact, it bailed out the Finance Minister in 2004-05. Mr. Chidambaram estimated revenues from two dozen sectors in the service tax net at Rs. 14,150 crore but the accruals from `other services' fell below expectations. It was left to the telecom sector along with insurance to make up for the shortfall.

In the current fiscal too, he plans to earn over Rs. 5,000 crore from the telephones segment. This will be nearly one-third of total accruals of Rs. 17,500 crore from the service tax account.

Going by the strong growth of 30 per cent in telephone connections, Mr. Chidambaram is likely to get more than he expected once again. And he will expectedly set his sights for the next fiscal too.

New ADC regime

The Communications Ministry has already set the stage for further buoyancy, approving a more liberal access deficit charge (ADC) regime. The new rates have won the industry's approval. With Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited having announced a flat tariff of Re. 1 from March 1, regardless of the distance called and with the new ADC in place by then, the private industry will also join the battle for enrolling more customers at cheap prices.

Going by the conventional logic of demand rising with a fall in prices, Mr. Chidambaram will hope to rake in a much higher amount as service tax from telephones during the next fiscal.

Internet

Phones are not the only area of revenue generation. After an initial slump, Internet via broadband has also taken off, providing another small but potentially significant revenue stream.

Expansion in these areas means companies will order more equipment to finance their plans. BSNL alone has network expansion and strengthening plans to the tune of Rs. 10,000 crore in the next couple of years. That translates into significant tax earnings for the Centre.

Officials in the Communications Ministry as well as private industry representatives hope that the Finance Minister will return the favour by acceding to some of their long-pending demands for fiscal incentives. Many of the demands have been formally made by the Communications and IT Minister Dayanidhi Maran but they have not found favour so far.

The big question doing the rounds is whether Mr. Chidambaram will oblige him, especially after the consistently handsome contribution by the telecom and IT sectors to state finances.

The Finance Ministry has already increased the ceiling on foreign direct investment (FDI) from 49 to 74 per cent.

Immediate impact

The immediate impact is an inflow of nearly Rs. 5,000 crore from Vodafone, the world's biggest operator of mobile phone services.

Several other deals are in the pipeline. The net effect will be more funds to finance the expansion of non-state run phone companies. But that is on the services side.

On the manufacturing side, the basic customs duty on cellular phones along with all telecom industry items was reduced to zero on March 1 last.

That was more because of India's commitments under the World Trade Organisation (WTO).

It is time India asked for a reciprocal duty access from countries which were not signatories to the global Information technology Agreement (ITA) and thus allowed the industry to gain preference in the world market.

The industry hopes that this should be accompanied by incentives to the manufacturing sector.

One incentive could be a zero excise duty on mobile phones to enable production of three crore handsets valued at Rs. 7,500 crore-Rs. 10,000 crore, generating 25,000 jobs in the process.

Downstream industry

The downstream industry, meaning parts, components and accessories sectors, also hopes for a favourable mention by the Finance Minister.

The chip manufacturing industry has announced plans to set up manufacturing facilities. As in other countries, it will need a kick-start in the form of Government incentives.

The same expectation holds true for the other downstream sectors.

Having delivered to the Central exchequer revenues that surpassed initial estimates, the industry wonders whether the Finance Minister will return the favour in this budget.

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