As of March 2016, only ~25% of the urban populace and ~4% of the rural populace were broadband subscribers in India. Subscriber growth is concentrated in densely-populated urban areas, which accounted for approximately 74% of the broadband subscriber base in FY16.
Affordability of equipment and services remains a major constraint in achieving government’s target of connecting 600 million subscribers on broadband by 2020. The Alliance for Affordable Internet is a coalition that measures the affordability of internet access across nations, especially developing countries. India ranks 31st out of 51 developing/emerging countries as per Affordability Drivers Index (ADI), indicating a significant need for improving affordability in India.
The high cost of broadband, which attracts 15% service tax (including applicable cess), in line with other telecom services, increases the cost to end consumer. Affordability in India needs to be improved both in terms of cost of service and device cost.
Taxes need to be reduced on broadband-related devices and services to reduce the cost of ownership, making broadband more affordable.
With the introduction of GST, the cost of service may go up in the short to medium term and it is imperative that concessions are provided to users in lower strata of income, especially in rural areas to increase penetration.
Given the lower level of broadband penetration in rural areas, there is a need for increasing the awareness. The government should consider including expenditure incurred on education programmes for broadband awareness in rural areas and special provisions for tax deductibility of such expenditure in the list of permissible CSR activities under the Companies Act.
Additionally, the telecom service providers are not eligible to claim deduction for expenditure on research and development (R&D) under section 35(2AB) of the Income Tax Act. Telecom service companies should be encouraged to undertake in-house R&D, and therefore, should also be included as eligible companies for claims under section 35(2AB).
The government could also consider addressing subgroups (rural/remote areas, students/youth, women, agrarian, etc) where the current penetration is low with targeted tax incentives. For instance, in order to increase the reach of broadband for low-income consumers, the US government initiated the Lifeline Program aimed at providing discounts on phone services and broadband to eligible consumers at a fixed $9.25 per month each.
There are a few precedences under the Indian service tax laws wherein the government has granted service tax exemption to low-cost houses to promote the affordable housing sector. To promote higher penetration of broadband services in the rural sector, a similar exemption can be provided. It is also to be noted that considering the proposed implementation of Goods & Services Tax (GST) in India, wherein all the assessees are required to undertake compliances in electronic form, broadband connectivity in far deeper places will be very critical.
Any incentive in this area will help the government achieve not only greater digitalisation but also higher compliance from the businesses.
Countries across the globe are focusing their investments and resources on achieving 100% broadband penetration. India is now far from the agrarian economy it was in 1951 when 55% of gross domestic product (GDP) came from agriculture, with services contributing 62% to GDP in 2015. Hence, it becomes imperative for the country to give tax incentives for broadband penetration.
To sustain the national economic growth, to bridge the socio-economic divide between various sections and to strengthen our position as a knowledge-driven economy, broadband must be considered priority in the Budget 2017-18.
The writers are partners at Deloitte Haskins and Sells LLP.