India's phone companies are staring at a cumulative annual hit of Rs 5,500-6,000 crore after the government doubled import duty on multiple telecom network products to 20% to help shore up the rupee. This will add to the financial stress on telcos, slow 4G rollout and possibly compel carriers to raise prices of services soon.
The government increased basic customs duty on a host of mainline network products and imposed fresh duties on printed circuit board assemblies (PCBAs), which were earlier exempt, late on Thursday.
Base stations, optical transport gear, IP radios, MIMO/4G LTE products, VoIP phones, media gateways, gateway controllers, carrier ethernet switches, packet transport nodes and a mix of packet optical transport product or switches will attract 20% duty.
Printed circuit board assemblies used for these will face 10% duty. The moves are aimed at curbing the import of non-essential items to rein in the current account deficit and bolster the rupee, which has weakened sharply against the dollar, besides giving a boost to local manufacturing.
Equipment makers are likely to fully pass on the higher burden, adding to costs, executives and analysts said. "A 10% increase in basic customs duties on multiple telecom products could inflate the combined annual network gear import bills of Vodafone Idea, Bharti Airtel and Reliance Jio Infocomm by at least $750-800 million as vendors are unlikely to absorb the higher duties," said Rohan Dhamija, partner and head of India and the Middle East at Analysys Mason.
Phone companies are reckoned to import nearly $8 billion of network gear annually, primarily for 4G rollout, from foreign vendors such as Ericsson, Nokia, Huawei, ZTE and Samsung.
Bharti Airtel, Vodafone Idea and Jio didn't respond to queries. Neither did equipment makers Ericsson, Samsung and ZTE. Huawei said it is evaluating the finance ministry's notification raising import duties.
Telecom company executives said the sharp duty hike would lead to cost pressures as telcos have no immediate option to substitute 100% of their network gear requirements from local suppliers. They added that the additional cost would add to the financial burden on an industry reeling under a debt of nearly Rs 8 lakh crore and grappling with slumping revenue and profitability amid brutal competition.
The increased duty "will adversely impact broadband rollout since the products attracting higher 20% duty are absolutely essential import items for meeting National Digital Communication Policy-2018 objectives and future 5G services rollout plans," said Rajan Mathews, director general of the Cellular Operators Association of India lobby group.
Operators will be forced to "incur 10% additional import costs, which would further burden an industry that is already debt-ridden and in severe financial distress," he said.
A Nokia India spokesman said telecom gear would become more expensive, hurting the financial health of the industry.
Sector experts, however, believe the duty hike could drive the big telcos to import network equipment from countries that have friendlier tax regimes such as Vietnam, with which India has a free trade agreement. India doesn't make the products attracting 20% import duty at the scale of overseas producers, they said.
"Asean countries like Vietnam are fully aware that the next few years are critical for India to tone up its broadband act, which is why they've put in place a tax-friendly regime to become a global telecom gear manufacturing hub and the higher duty could prompt vendors to source imports from such markets," said TV Ramachandran, president of the Broadband India Forum (BIF), which counts Huawei, Qualcomm, Facebook, Google, Microsoft, Hughes and Intel among its key members.
Ramachandran said many Asean member countries are already "giving four to 10-year tax holidays along with multiple incentives to attract global network vendors to set up high-tech ICT (information and communications technology) manufacturing units, and India must not be left behind".
The Telecom Regulatory Authority of India last month called for the imposition of import duties on telecom products outside the ambit of the Information Technology Agreement (ITA-1) and incentivising their local design and production with an aim to fully eliminate India's dependence on imported telecom equipment by 2022.