Pre-budget memorandum of Internet Service Providers Association of India

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1 Pre-budget memorandum of Internet Service Providers Association of India Background The liberal and non-exclusive licensing of Internet services has resulted in availability of Internet services across the breadth and length of the country. Though the number of subscribers has grown almost 20-fold in the past 4 years, challenges lie ahead in achieving the target of 23 million subscribers of Internet during the ongoing 10 th Five Year Plan. For your perusal, we have tabulated some key indicators of the sector hereinbelow: S. No. Parameter / Indiactor Figures 1 No. of valid ISP licensees No. of ISPs operational No. of dialup subscribers 35 lakh + 4 No. of leased line subscribers No. of Internet users 2 crores + 6 No. of cities covered Total investments so far Rs crores 8 Total accumulated losses Rs crores 9 Fresh investment required during the Tenth Five Year Plan Rs crores We believe that the public finance policy plays an equally important role for the sustainable growth of any sector. Reduction in the basic customs duty of cellular handsets was one such example which paved the way for making cellular phone affordable to the masses. At the same time, due to enhanced demand, revenues were also not impacted in absolute terms. This is especially true in the case of Internet where the government is exploring all possibilities to introduce citizen-interface through scalable and standardised e- government applications at all levels central, state and local. The potential for Internet usage is immense with the ongoing developmental initiatives like Indian language application and translation application and focus on content development that is local in context and is hosted within the country. With the commencement of operations by various Certifying Authorities licensed under the Information Technology Act, 2000, E-Commerce in the real sense is poised to take off, giving further fillip for Internet services.

2 Numerous public Internet kiosks and sanchar dhabas are also making affordable and ubiquitous Internet access possible for the masses just what PCOs did for telephony earlier. ISPs have invested a lot in all the three layers of network (viz. the access or the last mile, the domestic backbone and the international gateways) as well as in systems for customer care, content development and hosting. It is well known that Internet Industry in our Country is in nascent stage and ISPs are yet to recover accumulated losses. Even the present levels of revenue realisation are leading to losses and it will be quite some time before operations become profitable. At the same time, there is a need for continuous investments. Thus, it is imperative that the total cost of usage for Internet be significantly brought down through appropriate policy direction and requisite modifications so that not only the operations of ISPs become viable but also the total cost of using Internet access by the masses. The latter can be done by measures resulting in direct reduction in the cost of Internet access device (VoIP devices, Set-top boxes and cable / DSL modems, radio equipment, etc.) as well as by making alternatives to dialup access by way of radio and DSL. Recommendations In view of the forgoing may we recommended that : - 1 Under the Exemption in Custom Tariff Schedule, the List 22 should be revised so as to include additional equipment as enlisted in the Appendix as also extension of the concessional rate applicable on the goods enlisted thereunder for at least another 2 years. It is pertinent to mention here that: - as per Notification no. 21 dated 1 st March 2002, the concessional rate applicable on goods specified under the List 22 is valid till 28 th February 2003.

3 - for the sake of clarity, it would be worth modifying the current terminology Other Radio Communication Equipment (Including VHF/UHF & Microwave Communication Equipment) to Other Radio Communication Equipment (Including VHF/UHF & Microwave Communication Equipment for Point to Point as well as for Point to Multipoint configurations / usage). 2 The basic customs duty applicable on the CPE (Customer Premises Equipment) like VoIP device, modems, DSL modem, cable modem, set-top boxes, Wireless LAN equipment and the customer-end Radio Communication Equipment should be brought down to a level not exceeding 5%. It is pertinent to mention here that: - these equipment in the context of Internet services are akin to the cellular handsets in the context of cellular services. - the list of the equipment suggested hereinabove have been separately included in the Appendix. 3 Sub-section (2) under Section 3 of the Service Tax Credit Rules, 2002 notified vide no. 14/2002-SERVICE TAX should be modified suitably such that the taxable services defined in sub-clauses (zh) and (zd) & (ze) of clause 90 of section 65 of the Act shall be deemed to be falling within the same category. It is pertinent to mention herein that provision of services like Internet access, leased lines and telegraph are all telegraph services as per the clause (1) of Section (3) of the Indian Telegraph Act, Thus, every provider of such telegraph services requires a license granted by the Government under the sub-section (1) of section (4) of the said Act and is designated as a Telegraph Authority thereunder. Thus, even if Internet access being provided by the licensed ISPs has been covered in the definition in the sub-clause (zh) of clause 90 of section 65 of the Act and leased lines and telegraph services defined in sub-clauses ( (zd) & (ze) of clause 90 of section 65 of the Act are essentially of the same nature, viz. telegraph services being provided by a telegraph authority under the Indian Telegraph Act, 1885.

4 Also, use of input services like telegraph services and leased line services provided by other telegraph authorities to ISPs (also designated as telegraph authority ) is a requirement precedent for offering their output service, viz. Internet services, which is covered under the definition in sub-clause (zh) of clause 90 of section 65 of the Act. Hence, there is a rationale in permitting ISPs to avail credit against the service tax paid by them towards input services of at least the same nature, viz. telegraph and leased lines for which they anyway pay applicable service tax to other telegraph authorities. Item Descriptions Existing Customs Duty Basic CVD SAD Effective Polic (%) (%) (%) Duty (%) Select items under the existing List ATM, Frame Relay & Ethernet Switches # % Other Apparatus for Carrier Current Line # Or for Digital Line System DWDM Equipment Routers Fre HDSL Systems Fre Other Radio Commn. Eqpt. (Incl VHF/UHF & Microwave Commn. Eqpt for point to point as well as for point to multipoint configurations / usage) Satellite Commn. Eqpt Network & Logic analyser Fre Signal Analyser Fre Automatic Test Eqpt Fre Suggested items to be included in the List Remote Access Servers, Universal Access Fre 30 Server % Other Unit of Automatic Data Processing Machines Incl. % Firewall / Intrusion Detection Systems Others incl. Luna Token (high security H/W

5 Cards) % Un-interupted Power Supply (UPS) Fre Digital Loop Carrier Systems (DLC) Fre Suggested List of Customer Premises Equipment (CPE) for consideration of lowest customs duty VoIP Devices such as H.323 Terminal / SIP Terminal /, % Subscriber end Eqpt (Modem+Ethernet) Fre Modems Modems below 9600 bauds incl. Internal Card Fre 10 Modem Modems above 9600 bauds Fre Set Top Boxes Wireless LAN Equipment % ISDN Terminals Fre ISDN Terminal Adapters Fre Transmission Apparatus Incorporating reception apparatus Satellite Receivers Restr