A Case for Survival?

While the government always talks welfare economics and private sector

profits, this is a classic case where the two have decided to swap roles–at

least as far as dial-up subscribers are concerned. However, this may change soon

if the demand of the Internet Service Providers’ Association of India (ISPAI)

is met.

According to ISPAI, the July 16 decision to impose 5% service tax on Internet

services means that dial-up subscribers at present will be forced to pay taxes

twice for using the same service–5% as service tax on their phone bills and

another 5% for Net services. ISPAI also feels that service tax has been imposed

prematurely on a nascent Internet industry, which is struggling for viability

and requires large investments for the setting up of infrastructure to cover the

vast geography of the country.

What are ISPAI’s wants?

The ISPAI has sought a withdrawal of the 5% service tax on ISPs for a period

of at least three years and the customs duty on equipment used by them. ISPs pay

service tax to the respective access and national long distance service

providers on account of leased lines and dial-up connections. ISPAI officials

also put forward the recent development in the US as a case in point.

"The move," explains S Murali, CFO, HCL Infinet, ‘‘is an

attempt to protect the fledgling online industry, as only 1% of purchases are

made over the Internet in the US." This logic is even more applicable in

the Indian environment, where the total Internet penetration itself is just

about 0.2%. Purchases on the Net are thus negligible in India and hence the need

to remove service tax on ‘online data retrieval and access services,’ under

which ISPs have become liable to this.

But then, ISPs plan to pass off the burden to subscribers, so what’s

worrying them?

All about marketshare...

On the face of it, it appears to be a noble intention of the ISPAI to lessen

the burden on subscribers, and there is no reason to doubt it. But there is

another compelling reason too. While there are approximately 35 lakh Internet

subscribers in the country, the tenth Five-Year Plan projects an addition of 23

million subscribers by 2007. However, the imposition of service tax on Internet

services has come as a jolt to the entire Internet industry. ISPAI members argue

that this will have serious ramifications on the growth in subscription as

enunciated by the Planning Commission, especially when the entire industry is

reeling under the impact of a global slowdown.

For the Indian ISP industry, which is still in its nascent stage with a

shallow subscriber base, the additional burden of service tax–ultimately borne

by the subscribers–will have a definite negative impact on the growth rate of

the subscriber base. Not to forget that the introduction of such a tax on

Internet services will lead to indirect double taxation. And though it means an

additional Rs 50-55 crore in the government coffer, experts suggest it would

delay the dream of a networked India. And that’s what can make the business

viable for ISPs.

Dhanya Krishnakumar in New Delhi