operators. Indian states have implemented individual taxes and this has been a disincentive to the
free movement of manufactured goods within India including mobile phones. Until recently
India had implemented a time-consuming tax reimbursement policy whereby firms had to pay a
central sales tax and then were reimbursed at a later date for their payment. Moreover, tax law
has been unclear on the treatment of research and development and this may have discouraged
this activity.41
Telecommunications licenses to private phone operators have been granted on an
arbitrary basis at varying prices.42 Phone licenses have been issued separately for international
service, long-distance service, basic and cellular mobile phone services. These licenses all have
different fee structures and conditions.43
The regulations on foreign ownership have been unclear and have led to confusion.
Previously, foreign-owned firms are limited to 49 percent ownership of an Indian company
providing telecommunications services. However, in the past it was technically possible for a
foreign entity to have up to 74 percent total ownership in an Indian telecom firm through direct
and indirect investment methods. The exploitation of this apparent loophole has caused some
elements of the Indian government to oppose further increases to the FDI cap in the
telecommunications area. The Indian government has recently clarified the discrepancy in
investment and allowed companies in non-compliance with the 74 percent investment rule four
months to reach compliance.44
The legal and regulatory environment in India is relatively transparent but very slow.
Litigation and enforcement of contracts can take years and even decades to resolve. This has
41 Report of the Committee on Compilation of Foreign Direct Investment in India.
42 Economist Intelligence Unit, “Economic Policy: Telecommunications Licensing Policy”, Country Report - Main
Report, December 1, 2004.
43 Economist Intelligence Unit, “India’s telecom troubles: Inching towards solutions”, Business India Intelligence -
Main Report, October 8, 2003.
44 “Telecom Companies to get four months to comply with FDI norms.”, India Telecom, 11 (4): 12, April 2005.
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