Union Budget 2024

Article

Space Sector

Budget expectations: Union Budget 2024

Sreeram Ananthasayanam, Partner | Goldie Dhama, Partner | Shilpy Chaturvedi, Partner

 

Current environment

  • The last year was extremely exciting for India’s space industry. With its remarkable lunar and solar missions that captured the nation’s imagination, the Indian Space Research Organisation (ISRO) inspired pride and enthusiasm across the country. However, the excitement did not end there; it marked the onset of several important initiatives. These included significant international cooperation agreements, such as the Artemis Accords and the Critical and Emerging Technology (iCET) initiative, and the transfer of space technology to the private sector. Moreover, the sector witnessed an unprecedented influx of private investments, reaching record levels across segments to affirm its significance. The announcement of an FDI policy amendment for the space sector in February 2024 has led to an increase in private investments and partnerships with global companies. This change will also facilitate the transfer of technological innovations from around the world to India.
  • This extraordinary surge in space-related activities coincided with the introduction of the India Space Policy in 2023. This historic policy outlined a visionary roadmap for India’s burgeoning space economy and ushered in the active participation of Non-Government Entities (NGEs) in core space endeavours. An integral part of this transformative journey is the Indian National Space Promotion and Authorisation Center (IN-SPACe), which unveiled a 10-year strategy for the nation’s space sector. The audacious vision for the sector stands at US$44 billion by 2033.
  • While 2023 offered a glimpse into the promising future of the Indian space sector, it is crucial to underscore the nascent nature of the private and non-government segment in this domain. Achieving the ambitious vision outlined in the India space policy necessitates the orchestration of a series of strategic government initiatives. These measures are essential to promoting steady growth and fostering innovation in the sector, where private enterprises are set to play a pivotal role.
  • As the space sector evolves, it represents India’s commitment to exploration, innovation and self-reliance. The path ahead is challenging and thrilling, with immense potential waiting to be harnessed. In the following paragraphs, we delve deeper into critical economic and policy imperatives and recommendations that could propel India’s space industry to even greater heights.


Expectations


Top three asks

  • While the India Space Policy 2023 highlights the government’s vision for the sector, the industry believes that the possibility of a policy not being enforceable in a court of law is unfavourable for the sector. This is because challenges around international and national obligations and liabilities, and enforcement of standards can be conclusively answered only in the form of legislation. Hence, the early enactment of the much-anticipated Space Activities Act may be optimal for the Indian space ecosystem.
  • The industry has acknowledged GST exemption provided on satellite launch services. However, the exemption can be extended to other critical components of satellites, ground systems and launch vehicles for the good of the sector’s value chain. While such exemption reduces GST cost on output activity of satellite launch services, it is still important to consider the resultant impact on the input tax credit on the procurement of goods and services. This increases the cost of providing service. Therefore, a similar exemption should be provided for businesses procuring key goods and services (including capital goods) for satellite launch services. This will help reduce the GST input tax credit costs and the intended benefit would be enjoyed by the supply chain.
  • As space industrial parks planned to be developed in various states, many NGEs (legacy + start-ups) plan to make large greenfield investments. Therefore, other initiatives, such as tax exemptions/tax holidays/accelerated depreciation for companies directly or indirectly engaged in space sector activities, must be considered. Furthermore, specific customs duty exemption and concessions on import of goods/equipment/machinery used to manufacture notified goods under the Import of Goods at Concessional Rate of Duty scheme (IGCR) should be considered for the sector.
  • The space industry requires substantial funding for capital-intensive projects, such as R&D, satellite manufacturing and the construction of satellite launch and earth stations. Reducing the tax rate on interest on foreign borrowings to 5 percent could encourage Indian companies to access foreign funding at cost-effective interest rates for project financing.
  • Currently, there is a 10 percent withholding tax on payments made to Indian companies providing satellite services under Section 194J of the Income Tax Act, 1961. However, the effective income tax rate on revenue for service providers operating under a distribution model, where they distribute satellite capacity in India, is less than 10 percent. This is primarily due to the arm’s length profit margin for Indian companies typically falling within the range of 5–10 percent. Even in the case of service providers offering services through their own or leased satellites, the initial period witnesses a lower effective income tax rate on revenue. To ensure that funds are not tied up to enable a seamless working capital flow, the withholding tax rate should be reduced to 2 percent on payments made to Indian companies.
  • As self-reliance has been one of the key objectives behind opening the sector for private participation, ensuring the journey towards self-reliance is focused on each value chain segment is important. To that extent, it may be time to consider a dedicated Production Linked Incentive (PLI) scheme to manufacture space-grade components, much like the recently announced dedicated PLI scheme for drones and drones’ components. This will incentivise domestic production under the “Make in India” campaign and attract investments by providing financial incentives to manufacturers based on their output.
  • In the NewSpace era, where private sector efforts will complement national space agencies and public sector efforts, the nature of space-based applications and services makes governments critical consumers/customers of the sector. As space technologies find applications in governance areas, such as agriculture, disaster management, infrastructure planning and development monitoring, urban development and remote area connectivity, the government’s commitment to adopt and consume NewSpace solutions will catalyse adoption and innovation in the sector.
  • In line with the above, a Digital Public Infrastructure (DPI) and Digital Public Goods (DPG) approach for Earth observation-based geospatial analytics and insights can unlock value and innovation for stakeholders beyond the space sector. In line with previous budget announcements to create DPI for sectors, including agriculture, a budget announcement for a DPI/DPG for earth observation will democratise access to space technology.
  • As the space sector matures, the space economy’s size and composition should be regularly measured. Most of the mature space-faring countries/regions, such as the US, the UK and the EU, have annual exercises to scientifically measure and quantify the space economy. Annual exercise anchored by competent authority within the government to measure and disclose the size of the space economy, will enable quick and hassle-free investment decisions by the government and private and international stakeholders.

 

Policy recommendations and expected impact/outcome

  • Provisioning of spectrum for satellite applications, such as remote sensing and communications, is mission-critical for the sector. With Indian companies gearing up to meet global demands, adherence to global standards both nationally and internationally is important for innovating in India. Hence, a long-term commitment from the government on provisioning spectrum for satellite applications in India is needed. Sustained efforts at international forums to maintain global standards and a level playing field for countries will be critical.
  • Like the telecom sector, satellite service providers may be obligated to remit a one-time licence or spectrum fee to the government to secure the licence to deliver satellite services in India. Additionally, an annual licence fee based on revenue may apply. At present, the provisions in place, as applicable to the telecom sector, allow for the amortisation of the one-time licence or spectrum fee over the typical licence duration that ranges from 10 to 20 years. Regarding the deduction of the annual licence fee based on revenue, a legal precedent set by the Supreme Court deems this expenditure akin to a one-time fee and mandates its amortisation over the remaining licence period. This treatment of delayed deduction of costs has led to increased tax liabilities. For the satellite sector, a more equitable approach would involve permitting a 25 percent depreciation. This is in line with intangible assets on the one-time licence or spectrum fee, while recognising the annual licence fee paid based on revenue as revenue expenditure. The depreciation could yield lower taxable profits for satellite service providers, optimising tax impact and providing economic impetus to business operations.

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