India: Information and Communication Technology Regulatory Framework*

Last Updated: 20 October 2005
Article by Rahul Goel

By Rahul Goel# and Mohanty**

The present laws governing ICT have been derived from the Indian Telegraph Act 1885, Indian Wireless Telegraphy Act 1933, The Telegraph Wire Unlawful Possession Act 1950 and the Cable Television Networks (Regulation) Act 1995. In the recent past the Telecom Regulatory Authority of India Act 1997 (TRAI Act) was enacted, paving way for the constitution of the first ever telecom regulatory body in India, known as Telecom Regulatory Authority of India (TRAI). The TRAI apart from telecom has recently been entrusted with the task of regulating and drafting of policies relating to broadcasting sector.

The Government of India in 1998, with a view of promoting ICT industry, formed a National Task Force on Information Technology and Software Development. The Task Force was assigned the task of drafting national policy on IT and also to look into the issues relating to privacy and data protection.

The second phase of revolution came with the unveiling of the New Telecom Policy 1999. To address the disputes arising out of new regulatory framework, a Telecom Disputes Settlement and Appellate Tribunal (TDSAT) was setup. TRAI Act governs the functioning of TDSAT. Appeals of TDSAT rulings can be made with the Supreme Court of India.

The growth of IT industry and e-commerce, lead the government to enact the Information Technology Act 2000 (IT Act 2000). The issues relating to cyber crimes, data security, digital signatures, electronic commerce etc are covered under the IT Act 2000. The IT Act 2000 grants legal sanction to e-commerce transactions and also prohibits breach of confidentiality and privacy.

The Department of Telecommunications (DoT), under the Ministry of Communications and IT, acts as a licensing authority and also allocates telecom frequencies. All the decisions relating to clearance and setting up of a BPO unit under Other Service Provider category are taken by DoT. The policies regarding interconnection, unified licensing etc. are drafted by TRAI and are sent to DoT for final approval.

Data Protection / Data Privacy

In India, the Information Technology Act, 2000 is the act, which governs the cyberspace. The act tries to cover the issues relating to electronic transactions, digital signatures, hacking and network service providers. The act further tries to resolve the issues relating to cyber jurisdiction and also applies to offences and contravention committed outside India by any person irrespective of his nationality.

The act is silent on the issues relating to access and sharing of personal information as is applicable under data privacy laws of many countries. There are no specific provisions, in the current act, which relate to data privacy of individuals. With advancement in technology, the circumstances and transactions as mentioned in the IT Act 2000, may not be able to provide protection and remedy to the companies and individuals carrying on their business activities relating to personal data. Thus it is left to the freewill of the parties to get into data privacy agreements. This primarily affects the outsourcing / BPO companies from America and Europe, where they have a law providing protection to personal data.

The Government of India has shown its concern over the issue and has very recently established a committee to suggest amendments in the IT Act 2000 with a focus on data privacy and protection. The law as expected would be baased on EU’s Data Protection Directive. The committee is expected to submit its report to the government by the end of this year. It is further estimated that the law governing data protection would be in place early next year.

The Licensing Regime

Earlier in 2003, based on the recommendations of TRAI, DoT implemented the Unified Access Service Licence (UASL) at circle level. This change from service-specific licensing to unified licensing is another progressive step indicative of the evolution of the sector. Under the existing policy, operators holding UASL may provide both cellular and basic services within their specified service area without obtaining separate licences. The licence holders (licences granted under the old regime) are given an option either to migrate to UASL or to continue with their original licences. All the new licences under the existing regime are categorized as UASL. Under the existing regime, the licence holder can only provide unified services in its licensed circle.

The TRAI has very recently issued draft recommendations on Unified Licensing, which are similar to international practice and are already in place in many countries including EU. The objective of the Unified Licensing Regime is to simplify the procedure of licensing in telecom sector, ensure flexibility and efficient utilisation of available resources. This also includes recommendation for allowing licence holder to provide service throughout the Indian Territory irrespective of its circle. The licenses shall be granted in three different categories –

  • Unified License - All Public networks including switched networks, irrespective of media and technology, capable of offering voice and/or non-voice (data services) including Internet telephony shall be covered under this category.
  • Class License - All services including satellite services, which do not have both way connectivity with Public network, shall be covered under Class license.
  • Licensing through Authorisation - This category will cover the services for provision of passive infrastructure and bandwidth services to service provider(s).

Spectrum Allocation

Wireless Planning and Co-ordination (WPC) wing under DoT is responsible for allocation and management of spectrum. WPC while allocating spectrum follows the National Frequency Allocation Plan 2002. The spectrum under the existing plan is allocated on first-cum-first served basis.

The TRAI has recently published a consultation paper on spectrum allocation, efficient utilization and spectrum pricing. The paper is published with an aim to form consensus on decongesting networks by enhancing the spectrum availability and freeing up some portion of spectrum reserved for defence and security uses.

National Long Distance (NLD)

The New Telecom Policy 1999 provides for the issuance of licenses for NLD on a non-exclusive basis. The term of such NLD license for inter-circle Long Distance operations within Indian territories is an initial period of 20 years, which can be extended for a further period of ten years.

The applicant must be an Indian company, registered under the Companies Act 1956. The total foreign equity in the applicant company must not exceed 74% at any time during the entire license period. Investment in the equity of the applicant company by an NRI / OCB / International funding agencies will be counted towards its foreign equity.

The applicant company is required to have a minimum paid up equity capital of Rs. 250 Crores on the date of the application and must submit the best proof thereof along with the application for license. The promoters of applicant company must have a combined net worth of Rs 2500 crores. The net worth of only those promoters is counted who have at least 10% equity stake in the total equity of the company. The constituent's having at least 30% of total equity in the applicant company must have an experience in the telecom sector.

International Long Distance (ILD)

There is no restriction on number of operators for providing International Long Distance Service. The DoT requires the applicant to be an Indian company, registered under the Companies Act 1956. The license for ILD service shall be issued on non-exclusive basis, initially for a period of 20 years, with automatic extension of the license for a further period of 5 years subject to satisfactory performance in accordance with terms & conditions of the license particularly with regard to the Quality of Service (QoS) parameters.

The applicant company is required to have a net worth of Rs 25 crores. The net worth shall mean as the sum total, in Indian rupees, of paid up equity capital and free reserves. The net worth of promoters shall not be counted for determining the net worth of the company for this purpose. The FDI limit in ILD is also 74%.

VPN Services / Closed User Groups

The Licensing conditions of Internet Service Providers (ISP) have been amended by the DoT, thereby allowing them to provide managed ‘Virtual Private Network’ services. The annual licence fee is fixed at 8% of the Gross Revenue generated under such licence. The DoT will charge one time entry fee depending upon the category of the ISP. Moreover, the ISP-with VPN licence shall be allowed to lay optical fibre cable or use radio links for provision of the services under their licence in its Service Area. ISPs may also enter into mutually agreed commercial agreement with infrastructure service providers for sharing of infrastructure. However, the ISP’s are prohibited from reselling bandwidth directly or indirectly.

The policy has been amended and implemented with an aim to provide a platform for utilization of bandwidth in a cost effective and efficient manner.

Under the existing norms, the licensed telecom operators are free to provide leased lines to their customers for setting up of Closed User Groups (CUG). Customers are not required to take any permission from DoT for setting up a CUG.

Other Service Providers (OSP’s)

The category of OSP’s is an outcome of National Telecom Policy 1999. Call Centres are registered under OSP category.

Companies registered in India are allowed to setup and operate Call Centres on non-exclusive basis. The permission for setting up a call center has to be obtained from the DoT and is valid for period of 20 years. 100% FDI is permitted in Call centers. Under the existing policy-

  • Interconnection of Call Centres of the same group of company is permissible for redundancy, back up and load balancing subject to the prior written approval from the DoT.
  • In the International Call centers, no PSTN connectivity is permitted at the Indian end. Both inbound and outbound calls are permitted from the International call centers.
  • Internet and IPLC connectivity is permitted on the same LAN at the Indian end of the International Call Center with the condition that no voice/data traffic shall be permitted from ISP to other destinations via IPLC of the call center.

Taxation of IT and Telecom

In the post liberalization era successive Governments have modelled their tax policies with an obvious intent to attract investments in the information technology and telecommunications sectors. Consequently, tax holidays and other benefits have been a regular feature in successive budgets.

Information Technology

Section 10 A of the Income Tax Act, 1961 as amended annually, exempted profits and gains derived by an undertaking from the export of computer software till the assessment year commencing on April 1, 2010. However, in respect of the assessment year starting from April 1, 2003, this exemption has given way to a maximum allowable deduction of 90% on the profits derived from software exports. Computer software as referred in section 10 A means:

  • Any computer program recorded on any disc, tape, perforated media or other information storage device; or
  • Any customized electronic data or any product or service of similar nature as may be notified by the Board of Direct Taxes.

Companies seeking to benefit from this provision must receive the proceeds from such exports in convertible foreign exchange within a period of six months from the end of the previous year in which the software was exported. Further, it is pertinent to submit here that profits from software exports will enjoy the tax benefits even if the sale proceeds are credited to an account maintained with any bank outside India with the approval of the Reserve Bank of India.

Units set up in Special Economic Zones (‘SEZ’) get additional benefits with respect to their tax liability. SEZs include free trade zones, software technology parks and electronic hardware technology parks. The Income Tax Act provides for a ten-year tax holiday to software exporting companies located in SEZs; provided the production starts on or after the assessment year beginning on April 1, 2003. The ten year period described aforesaid is broken up into three different phases of five, two and three years. In the initial five years the tax liability on profits accountable to exports is nil. This five-year period starts from the second year of production. The tax liability for profits with respect to the two consecutive years immediately following the aforesaid period of five years is fixed at fifty percent of the total export profits. As regards the last three years of the said ten years period the deduction allowed is an amount not exceeding fifty percent of the profit that is debited to the profit and loss account. (for the previous year in respect to which the deduction is to be allowed) However, the amount that is debited to the Profit & Loss Account must be credited to a reserve account to be utilized for the purposes of the business of the assesse software exporting company.

Section 10B the Income Tax Act contains beneficial provisions as regards taxation of 100 per cent Export Oriented Units (‘EOUs). EOUs engaged in production of software, are eligible for tax deduction for a period of 10 consecutive years up to the assessment year 2009-10.
The tax benefits described above is available irrespective of any change in the management of the company.

Sections 80 HH, 80 HHA, 80 – I, 80 – IA and 80 – IB also provide incentives to companies in the IT sector. However, a company cannot avail the benefits provided under section 10 A if it is enjoying tax sops under Sections 80 HH, 80 HHA, 80 – I, 80 – IA and 80 – IB.

Indirect Taxes

The information technology sector is also subject to the dynamics of the indirect tax structure. Indirect Taxes include Sales Tax, Customs, Excise and Service Tax. The rates of indirect tax influence the financial planning, procurement of inputs, choice of location and marketing activities. Sales tax is charged on inter-state sale of notified goods. Sales Tax being a state subject, the rates vary from state to state. In the absence of particular provisions or any judicial directive, computer software was till very recent exempt from Sales tax. However, subsequent to a ruling of the Supreme Court of India, ‘over the counter software’ or ‘off the shelf’ is now treated as goods and therefore subject to sales tax. ‘Customized software’ or ‘Canned software’ continues to be exempt, as in terms of the aforesaid ruling such software are not goods.

Software is exempt from Customs Duty. Customs Duty is levied on various inputs used in the information technology industry. There has been a steady slide in the rates of leviable Customs duties for goods used in the IT industry. Recent steps taken towards creating a favourable environment for business activities in the IT sector include:

  • reduction in the peak rate of customs duty to 20%,
  • scrapping of Special Additional Duty (SAD) of 4%.
  • Customs duty on computers and peripherals reduced to 10%
  • Zero duty on

    • storage devices,
    • integrated circuits,
    • microprocessors,
    • data display tubes and
    • deflection components of colour monitors

In addition to the above, the Customs duty on project imports with investment of at least Rs. 5 crore in plants and machinery has been reduced from 25% to 10% while Customs duty on Information Technology Agreement bound items has been reduced as per commitments. Laptops brought as part of baggage are now exempt from customs duty.

The rates of Excise duty have followed the southward slide of other direct and indirect taxes with respect to the information technology related sector. Now the following are exempt from excise duty:

  • Nil Excise duty on:

    • Microprocessors,
    • hard disc drives,
    • floppy disc drives and
    • CD ROM drives

  • Pre-loaded software on the following are also exempt from excise duty:

    • PCs,
    • audio CDs,
    • recorded VCDs and DVDs,
    • cellular phones,
    • radio trunking terminals,
    • portable receivers for calling, alerting or paging;

  • Excise duty on computers has been reduced from 16% to 8%.

Information technology related services are subject to service tax. The last budget increased the rates of service tax from 8 per cent to 10 per cent. In addition there is a cess of 2 per cent on the service tax payable

Telecom Industry

Deduction is allowed section 80IA to the extent of 100% for the full term of 10 years. The telecom sector enjoyed certain benefits under Section 80 IA for services commenced before March 31, 2004. This has now been extended till March 31, 2005.

Customs duty on mobile switching centers for CDMA has been reduced to nil in the budget presented for the year 2004. This has brought CDMA and cellular operators to a level playing field as regards the custom duty on telecom infrastructure. Further, the rates of customs duty for the import of copper and fibre for the manufacture of cables have witnessed a steady slide in the last few years. Specified infrastructure equipment for basic/cellular/internet, V-SAT, radio paging and public mobile radio trucked services and parts of such equipments exempted from basic customs duty. Customs duty on cell-phones has been reduced from 10% to 5%.

*Source of the facts and information: www.dotindia.com, www.investindiatelecom.com

# Rahul Goel (LL.M - London) is an Advocate. His practice focuses on Technology, Media & Telecommunication, Pharma, Intellectual Property laws, encompassing patent, trademark, copyright, geographical indications, e-commerce/ IT laws and WTO laws. [email: rahul@goel.co.in]

** Sreejit Mohanty (B.S.L LL.B) is an Advocate operating from New Delhi and Bhubaneswar. His practice focuses on Corporate, Commercial, Taxation and Infrastructure laws. [email: sreejitmohanty@rediffmail.com]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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