Wednesday, February 01, 2006

The distorted taxation of Indian telecom

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.

5 comments:

  1. As it is, regulation in India has caused much more harm than good. In the telecom sector, it is even more dangerous, since technology evolution is too rapid for a governmental body to keep track of. The best thing to do is, as you suggest, reduce regulations to an absolutely bare minimum. Inter-firm trading, price wars, innovative offers, etc are what are going to help the sector grow.

    The rapid growth of the telecom customer base, while being a good thing for the companies, is also a bad thing for the companies, because it masks what is wrong with the regulatory mechanism. The government will let TRAI keep doing what it is doing under the guise of "if it aint dont broke, dont fix it".

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  2. Great article. I wish I'd seen it before I spoke on a panel on rural telecom at last week's Globalcomm India conference. While you make no argument that telecom is a good thing, there is strong evidence that investment in telecom has more payback (in growth of per-capita GDP) than any other form of investment including electricity, roads, even education! I've provided pointers to the relevant literature in these two posts:
    http://blogs.nmss.com/communications/2005/08/large_productiv.html
    http://blogs.nmss.com/communications/2005/10/strong_positive.html

    At Globalcomm, no one else seemed to be proposing any policy changes despite abysmal rural teledensity (2% vs. 31% in urban areas). So I tried to shake them up by arguing not only that the current system is broken, but:
    1. It’s well established that improving teledensity provides more economic benefit than any other kind of infrastructure investment, including roads, electricity and even education! I briefly sited papers by David Canning and by Waverman et. al.
    2. And yet total taxes paid by India’s telecom sector are higher than those in most other countries.
    3. Further, India has made less spectrum available (per M subs) than most other countries.
    4. And India has made no spectrum available in the 450 MHz band where propagation distances are much larger and the capital cost to reach rural subscribers is a quarter or less that of 800 MHz spectrum.

    I'm glad to see your article, even at this late date. Coming in as an outsider, I was amazed at how limited the discussion at Globalcomm was.

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  3. ajay..i would like to have ur advise on a business start up...wt do u think about a kiosks that provides charging mobile in a secure manner and a VAS service at the kiosks....hw do u c this...as business proposal to get into??? is ot the rite time 2 get into this kind???

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  4. Why does the operator have the major chunk of revenue in india as compared to abroad with VAS content providers.

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