Protect internet users from DoT's licence fee on broadband services

Economic Times, 25 April 2013

The department of telecom (DoT) is evaluating an 8% licence fee on broadband services, even on those that do not involve the use of spectrum. This is bad tax policy. First, all industries should pay only one indirect tax, the GST, which should be controlled by the finance ministry. Second, in the competition between broadband services that use spectrum and those that do not, it is sensible to have a spectrum fee only for users of spectrum.

India has come a long way from a complicated and fragmented tax system. We are headed towards two taxes: income tax and the GST. The ideal that we aspire towards is a single GST rate for all industries, other than a higher rate on intoxicants.

For fiscal and tax policies to be set up correctly, it is essential to have only one point of authority on tax: the finance ministry. If various ministries go around inventing taxes on things that they deal with, it will generate bad tax policy, and it will impede fiscal policy.

There is only one special case: the non-tax revenues associated with scarce natural resources. As an example, it is appropriate for the ministry of coal to come up with charging structures through which private firms that mine for coal pay the government.

In the field of telecom, the scarce natural resource is spectrum. Telecom policy must find the right charging structure for firms that use spectrum.

But DoT's idea, being challenged at TDSAT, doesn't fit this bill.

DoT should have the power to arrive at the mechanisms, and charging structures, for telecom companies that utilise spectrum. But DoT should have no power to determine the tax paid by a telecom company that does not use spectrum. That company should only pay the GST.

For an analogy, Sebi has no jurisdiction on charging taxes to mutual funds. Sebi can define conditions on who can be a mutual fund, but Sebi cannot tax mutual funds.

DoT argues that this tax is required in order to address regulatory arbitrage in the present arrangements about spectrum. The right solution to those problems lies in modifying the rules about spectrum.

Spectrum charges is the province of DoT; tax policy should be the exclusive preserve of the ministry of finance. The regulatory difficulties that DoT sees in spectrum policy should be solved by modifying spectrum policy, not by overstepping into tax policy.

Broadband services that use wires have an advantage over wireless broadband services: they don't use scarce spectrum. In a sensible policy framework, a firm that produces wireline broadband services will derive a financial edge owing to this difference.

As long as wireline providers are able to incur the fixed costs of building out their infrastructure, they would have this advantage. This is healthy and appropriate. Spectrum is scarce, and the charges paid to the government for using spectrum will ensure the best utilisation of it.

The first wave of internet access in India was dominated by wireless alternatives. But there are tremendous attractions of wireline broadband services. While our phones are 3G in principle, in practice, the bandwidth is low and bursty. In the future, this will improve, but the upside is limited by the scarcity of spectrum, particularly in dense urban settings.

Wireline broadband, in contrast, has no such constraints. It is only with wireline connectivity that dense urban settings can achieve pervasive high-speed connectivity. Coffee shops will pervasively give out free Wi-Fi only when they uplink through a wireline service.

The wireline rollout in India is slow, given the high upfront capital expenditure, and the difficulties of business on the ground in India.

Despite these problems, the industry is chipping away laying down wires all across the country. An additional 8% tax on them will impede the rise of this important alternative.

In summary, tax policy should be the exclusive preserve of the finance ministry. Fiscal policy, and the design of a tax system, can't be done when multiple departments engage in tax policy.

The only special case, where various ministries should have a say in non-tax revenues, lies in the utilisation of scarce natural resources. Telecom companies that use no spectrum, like mutual funds or steel companies or coffee shops, must pay only one fee to the government: the GST.

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