Indian telecom is burdened with a strange menagerie of taxes. I wrote a column in Business Standard today, where I argue that this is bad tax policy, for no industry or sector should face higher or lower taxes than any other. I make no argument that telecom is somehow a good thing and requires favoured treatment. I argue that telecom should be treated on a level playing field, like any other good or service in the country, and be placed into a single flat rate VAT. Simultaneously, all other taxes/charges being imposed upon the telecom sector should be removed. The only exception is the problem of allocating spectrum, where there is a case for an auction, while having a significant role for technologies like 802.11 where clever devices are used to render spectrum non-rival.
This approach would eliminate distortionary taxation of telecom, and thus lower telecom prices. It would make it possible for TRAI to move further in reducing telecom to much more of `an ordinary industry' and less of an area where there is rigidity about licenses/permits from the State that define what this or that vendor can do.
A lot of innovation in the future of telecom involves intra-sectoral trade between specialised telecom firms. There is a role for more firms who buy and sell telecom services to each other - e.g. a customer-facing VoIP firm could be buying bandwidth from upstream suppliers. Such an industrial organisation of the telecom sector is impeded by the present framework of licensing and taxation. Value added will be placed efficiently between competing firms if the tax treatment is a VAT.
Finally, spectrum allocation based on an auction would depoliticise spectrum allocation, and allow markets to shape the vendors and technologies who utilise the scarce spectrum.