Telecom companies absorb service tax impact – CS

Broker Credit Suisse said most Indian telecom companies have absorbed the impact of higher service tax on their accounts, instead of passing it on to customers by raising the price of vouchers.

“Our quick checks on tariff changes over the last couple of days suggest that telcos have largely absorbed the recent increase in service tax in the prepaid segment—leaving the net outgo for the subscriber unchanged. We suspect the postpaid revenues (<15% of total) are intact, as the higher tax has been passed on to subs," the brokerage said.

The government this month increased service tax rates from 12.36% to 14%, impacting everything from telecom to banking.

"On prepaid, this means that operators have either settled for a lower processing fee (lower rates per minute, unchanged minutes of usage), or cut the talk time on top-ups (lower minutes of usage, unchanged RPM). In all cases, this could hit prepaid average revenue per user by ~1.4% (3-4% hit on mobile earnings before interest and taxes)."

Credit Suisse said the development highlighted the lack of pricing power in the industry.

"Service tax affects all operators simultaneously, and to the same extent (a % of sales). When the industry has been unable to pass on such cost to customers, we are sceptical of spectrum cost (where the burden is clearly not uniform for all players) being passed on," it said.

"Overall, we remain cautious on the telecom sector," it said in a report to clients.