Convergence Plus
Friday, June 5, 2020
Handset Makers Seek Fast Action on Sourcing Norms

Foreign handset makers expect the budget announcement on easing local sourcing requirements for single-brand retail to encourage investments in India, but they want the government to make the changes meaningful and implement the proposal quickly.

“It is a welcome reform, but the real impact can be gauged only after the exact details of the sourcing norms are announced,” said Vikas Agarwal, head of India operations, OnePlus.

FM Nirmala Sitharaman did not announce details of the proposal in her budget on Friday. Current regulations require foreign-owned single-brand retailers to locally source 30% of the value of items sold in India. This rule has been cited as an impediment for investment by several foreign retailers. Single-brand retail is a “necessity” as the local retail ecosystem is yet to mature to global standards, Agarwal said, adding: “Given the ambitious goal of (India to become a) $5 trillion economy, we hope the execution will be swift and meaningful this year, without any further delay.”

Single-brand retail is critical for marquee brands wanting to set up stores in a market like India, since investments for such retail activities come from the brands themselves, and not local partners or franchisees who may not have as much skin in the game, an industry executive said. “For brands, it’s about long-term brand presence. They prefer direct investment to be able to make necessary investments in line with their global standards, but unless they meet local sourcing norms, they cannot invest,” this executive said. “As things stand, building a local sourcing and supply chain may not be an attractive opportunity for most brands due to small local scale, upfront investment and lack of clarity or uncompetitive incentives.” (Source: Economic Times)

DoT likely to start tracking system for lost mobiles next month

The government will launch a technology solution next month to enable detection of lost or stolen mobile phones that are operating in the country, an official said.

Stolen mobile The tracking system would make the detection of stolen mobile phones possible even if the SIM card is removed or unique code IMEI number is changed, the official revealed. The Centre for Development of Telematics (C-DoT) is ready with the technology and the service is expected to be launched in August.

“C-DoT is ready with the technology. The telecom department will approach the minister for its launch after the Parliament session. It should be launched in the next month,” a DoT official told PTI. The ongoing Parliament session will run till July 26.

The Department of Telecom (DoT) had assigned the mobile phone tracking project “Central Equipment Identity Register (CEIR)” aimed at bringing down counterfeit cellphones and discouraging theft to C-DoT in July 2017. The government has proposed to allocate Rs 15 crore for setting up CEIR in the country that will bring down the number of counterfeit handsets and discourage theft.

Lawful interception
The CEIR system will block all services on stolen or lost mobile phones on any network even if the SIM card is removed or IMEI number of the handset is changed. The system is also expected to protect consumer interest and facilitate law enforcement authorities for lawful interception.

It will connect the IMEI database of all mobile operators. It will act as a central system for all network operators to share blacklisted mobile terminals so that devices placed under the said category in one network will not work on the other, even if the SIM card in the device is changed, it said.

IMEI number - a unique 15-digit serial number of mobile devices - is allocated by global industry body GSMA and bodies authorised by it. When a mobile phone is lost, the victim is required to mention the IMEI number of the handset for tracking.” The pilot project (of CEIR) was carried out in Maharashtra,” the official said. (Source: The Hindu BusinessLine)

Buyback Tax Infosys, Others may Have to Pay 20% Levy Themselves

Repurchases worth ₹10,000 crore under progress; cos will not be able to make revisions to factor in the new tax. The government’s budget proposal to tax buybacks by listed companies could affect at least half a dozen share repurchases worth ₹10,000 crore that are already in progress. The list includes the ₹8,600 crore share buyback by Infosys, which has already begun. Since these companies have fixed their offer prices already, they will not be able to make revisions to factor in the new tax. Experts said such companies will have to pay the 20% tax themselves.

Previously, only share repurchases by unlisted companies were subject to such a tax. The measure is a part of anti-abuse provisions and aimed at curbing wrongful exploitation of the buyback route.

“The law does not provide any exemption for companies which have filed their prospectus with Sebi,” said Lokesh Shah, partner at law firm Luthra & Luthra. “Any buyback implemented on or after July 5, 2019, by listed companies is subject to the additional income tax, payable by the company, at an effective tax rate of 23.29% consequent to the buyback.”

Although the Infosys buyback opened for public subscription on March 19, the new tax will still be applicable since the rules apply to any payment a company makes for buybacks after July 5. The Infosys buyback will close on September 20 after which the company will make the payout to shareholders.

Share buybacks of Welspun, SKP Securities and Star Cements among others are in the offing.

Tax experts are awaiting clarity on how the buyback tax will be calculated. Currently, the tax on unlisted companies is calculated on the basis of the difference between buyback and issue prices. The government has extended the same formula for listed companies but that doesn’t take into consideration the fact that listed shares are frequently traded. Experts said tax should be calculated on the cost at which investors bought the shares and not the original issue price.

“Buyback tax is payable on the difference between buyback price and the price at which shares are issued by the company,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates. “As of now, the way the section is worded, for calculating the amount on which the tax is applicable, the purchase price of investor would not be taken into account and hence could lead to potential double taxation to that extent.”

For investors, buybacks will be beneficial as they will not have to pay capital gains tax on these shares. Until now, gains made from buybacks were subject to capital gains tax in the investor’s hand. Now, companies will have to deduct the tax based on the amount payable on account of share repurchases.

The government extended applicability of the new tax to listed entities since several companies were using buybacks instead of high dividends to return money to shareholders. In 2007, the government had introduced 15% tax on dividend distributed by listed companies. This tax is deducted by the companies based on their total dividend payout. The FY16 budget saw the introduction of additional dividend tax (ADT), which applies to any individual getting dividends worth more than ₹10 lakh in a financial year. ADT, unlike dividend distribution tax, is charged in the hands of investors.

“Buybacks were also being used by promoters to shore up their shareholding and acted as a method used for stalling the fall in prices,” said Tomu Francis, partner, Khaitan & Co. “The route will now become relatively expensive.” (Source: Economic Times)

‘AP to unveil new IT policy in 100 days’

The Andhra Pradesh government will unveil a new IT policy within 100 days or so, and the State government will focus on developing Visakhapatnam as the IT destination, M Goutham Reddy, the State IT and Industries Minister, told the media here on Saturday.

He said the government would review most of the agreements signed by the previous Telugu Desam Party (TDP) regime and review the policies relating to IT and industry development. “If there are any good features and policies, we will persist with them. It is not our policy to undo whatever the previous government had did,” he said in response to a question.

After a review meeting with the representatives of IT Association of Andhra Pradesh (ITAAP) and IT companies at Tech Hub along with Tourism Minister Muttamsetti Srinivasa Rao, he said that the government would ensure balanced development in both urban and semi-urban areas by promoting BPOs and MSMEs to generate jobs for the locals. (Source: The Hindu BusinessLine)

Cos may Buy More from Local Cable Firms

But some feel the customs duty hike on optical fibre will add to the costs, impact 5G rollout. The budget proposal to raise basic customs duty on optical fibre cables (OFC) to 15% from 10% will increase tower fiberisation costs, adding to the telecom sector’s continuing financial stress, and jolt India’s target to be 5G-ready by 2020, industry insiders said.

Indian OFC manufacturers, however, expect finance minister Nirmala Sitharaman’s proposal to encourage telecom companies to source the fibre locally, thereby giving a boost to its domestic production.

A major potential deterrent to India’s 5G ambitions is inadequate fibre connectivity, given that well below 25% of telecom towers are linked by fibre. And, the prospect of higher import duty on OFC sitting on top of chunky right of way (RoW) costs, the industry insiders said, would hinder the efforts to rollout reliable fibre-based tower networks that are critical to support 5G data speeds of 10 Gbps and next-gen applications such as video-on-demand and Internet of things to smart cities. Most 5G use cases also won’t even work without strong pan-India fibre connectivity. The latest Economic Survey estimates the telecom sector’s contribution to GDP to reach 8.2% by 2020 on the back of the industry players leveraging 5G technologies in a big way. The government, in fact, has resolved to make India 5G-ready by 2020 and plans to auction 5G spectrum later this year.

Senior tower industry executives see this to be a tough target to achieve. “The proposed hike in basic customs duty on OFC will result in higher capex, eventually burning a hole in the pockets of the telecom industry, which is already in a financial turmoil, and seriously impede 5G rollouts in India,” said Tilak Raj Dua, the director-general of the Tower & Infrastructure Providers Association (Taipa). The industry is in the process of estimating the overall incremental fiberisation cost per km following the proposed OFC duty hike, he said.

Taipa is an industry grouping representing Indus Towers, Bharti Infratel, ATC, GTL, Reliance Infratel and Tower Vision.

According to Dua, fibre is the most significant component to enhance fast broadband connectivity, and a sharp duty hike would undermine 5G rollouts in India where less than 25% of towers are fiberised, compared with as much as 80% in the US, China, Japan and South Korea. Another senior executive of a Big 3 telecom company backed the view, saying the “fibre capex component in a telco’s total network capex is likely to significantly rise in a 5G scenario from the current 35-40% level in 4G, which is why a higher OFC import duty, along with RoW costs, can sharply increase 5G rollout costs, going forward”.

Dua said India’s plans to become 5G-ready rapidly would face big challenges as a higher input cost structure would further push it behind pioneer 5G-deployed markets such as the US, China, Japan or South Korea.

Rajan Mathews, the director-general of COAI, downplayed the immediate OFC duty hike fallout “as most telcos are already sourcing their optic fibre and cable needs from domestic suppliers who have set up world-class manufacturing facilities”. (Source: Economic Times)

As Buyback Gets Taxing, IT Cos may Switch to Dividends

Govt looks to plug a loophole in buybacks as these are not taxed like dividend payouts. Cash-rich Indian IT services companies may now offer more dividends to return cash to shareholders, against the recent norm of share buybacks that have become less attractive with the budget proposing to introduce a new tax.

“Buyback is the most efficient way to return capital in India because it was not taxed earlier. It also helps companies improve the value when they think the market is not fairly pricing the stock,” said V Balakrishnan, a former finance chief of Infosys. “Suddenly you tax buyback, companies will shift to dividend because buyback comes with its own hassles.”

Share buybacks by listed companies aren’t taxed currently, but there is a 15% tax on dividend payment. To discourage companies from using this loophole, the budget has proposed a 20% tax on the money spent on share buybacks.

Technology services companies have been rewarding shareholders by buying back shares and issuing dividends. Top companies such as Tata Consultancy Services, Infosys, HCL Technologies and Wipro returned more than ₹40,725 crore to stockholders through share buyback in the past one year. Infosys has a stated strategy of returning 70% of free cash flow to shareholders, while TCS returns most of the cash flow to its shareholders. The most aggressive in using the buyback route in recent years has been Wipro, as it repurchased 14% of shares with three buybacks done over the past four years.

Equity analysts said the proposed tax would impact the stock performance of these companies over the next few days. “With the new buyback tax, the government would gain ₹8,145 crore (based on last fiscal year’s total buyback of ₹40,725 crore in the IT sector),” Madhu Babu, an IT analyst at Centrum, wrote in a note to clients. “Select midcaps like Persistent Systems, Cyient (and) Mphasis which could have been companies with potential regular buybacks stand impacted sentimentally.”

The brokerage also expects higher negative sentimental impact on Wipro.

It was understood that such a proposal to tax distribution of capital through buyback would come sooner or later, said Kuldeep Koul, lead analyst (IT services), at ICICI Securities. “Companies may still go for a buyback, the impact will be on effective return. But between a dividend and a buyback, buyback will still be beneficial,” Koul said.

Brokerage firm Prabhudas Lilladher wrote in a note it would retain its “underweight” stand on IT, citing the impact of the proposed tax on buyback of shares. (Source: Economic Times)

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