With more than a billion mobile phone connections and about 600 million internet users, Indian telecom industry is ready to usher in an era of sustained and converged digital platform as envisaged by the government in its previous innings. With the continued emphasis on digital advancement, the government has attempted to provide the much-needed impetus to the telecommunication sector, which has lately been reeling under its financial plight in the wake of ever-burgeoning levies from the regulators and cut-throat competition.
In the backdrop of the political stability purported by the recently concluded elections, the countdown to the Union Budget 2019 has begun. The Indian telecom industry, which is facing severe financial pressures owing to the ongoing price war, is hopeful that certain incentives will be offered to boost the sentiments. It is also eagerly anticipated that this budget will set the stage for industry friendly measures, helping in ease of doing business and minimising working capital blockage, which has been hampering the seamless functioning of the industry. Here are some of the key issues which continue to create uncertainties on taxation.
Direct tax Non-classification of standard telecom charges as ‘royalty’: Retrospectively amended definition of the term ‘royalty’ includes charges for transmission by satellite, cable and optic fibre. Resultantly, domestic as well as cross-border payments (even those covered by tax treaties) for a wide array of standard telecommunication services are under extensive litigation. The litigation continues despite favourable ruling of the Indian judiciary, which has not been appealed against and thus, accepted by the Indian revenue authorities.
It is the need of the hour that ‘royalty’ definition be amended to exclude from its ambit payments for standard telecom services. Besides, specific amendment should also be brought in to clarify supremacy of the term ‘royalty’ as contained in the tax treaties.
Withholding tax applicability on margins extended to distributors of prepaid services: In the absence of clarity on the withholding tax obligations on distributorship margin extended under a ‘principal-to-principal arrangement’, the revenue authorities continue to treat such margin as ‘commission’ and thus, subject to tax withholding by the telecom service providers. Given the quantum involved and the litigation on this issue, it is high time that this issue is addressed by bringing necessary clarifications on the characterisation of these payments. Even otherwise, considering the lower margins earned by the distributors, pending settlement of this issue on the nature of underlying arrangement between the telecom operators and the distributors in litigation, a lower withholding tax rate of 1 percent may be prescribed for telecom distributorship services. Rationalising of Minimum Alternate Tax (MAT) regime: Addressing the tax woes faced by the corporate sector, the government has been contemplating reduction in the tax rates. However, such alleviating move is countered by the MAT rates which continue to remain high and in fact dilute the tax incentives available under the normal provisions of the Income Tax Act. The liquidity woes faced by the telecom players today can only be counterpoised to a certain extent where the effective MAT rate of 21.54 percent is reduced at a comparatively reasonable rate of 10 percent, in line with the reduction in normal tax rate. Abolition of limitation on utilisation of MAT credit: The very intention behind introduction of the MAT regime was to ‘advance tax collection’ and ensure a steady influx of taxes into the government treasury. The taxpayers were on the other hand allowed to apply MAT credit over a period of 15 years where the final tax liability is under the regular provisions. However, considering that the economic stress of the telecom sector is likely to be prolonged, there is strong possibility of credit lapse resulting in permanent loss of duly paid taxes. The industry, thus, seeks removal of the limitation period of 15 years and allowance of the carry forward of the MAT credit indefinitely. Interest on spectrum payments: Spectrum allocations and payments made for acquisition of such spectrum rights have played a pivotal role in shaping the telecom industry as it is today. While there have been constant recommendations to the regulators for lowering of the spectrum charges and rationalisation of related loan liabilities, the outflow on spectrum related payments continue to pose a challenge. With a view to allow some respite to the telecom players, Finance Act 2016 clarified that expenditure on spectrum is amortisable. However, there was no specific clarity on the relatable interest payments made which is likely to result in protracted litigation. For removal of such doubts, an appropriate clarification should be issued to provide that the interest expenditure incurred towards acquisition of ‘right to use spectrum’, up to the date of put to use of the spectrum, is allowable as revenue expenditure. Refund of excess withholding tax: Non-grant of genuine withholding tax refunds due to other existing demands, despite such demands having been stayed or otherwise not recoverable, is another critical area that requires immediate attention. The industry urges amendment in the regulations and refund claim form (Form 26B) to de-link the refunds with other existing demands. Indirect tax Centralised registration: The GST regime necessitates registration, compliance and audits in all 36 states/ UTs instead of a centralised compliance mechanism which prevailed during the erstwhile service tax regime. The regulatory licences have been granted on the basis of the telecom circle system which covers multiple states in many cases whereas GST is to be computed at a state level. As a result, the compliance under the GST regime has gone up drastically resulting in unwarranted administrative hassles and complexities. It is important that the government reassesses the modalities of giving an option to have a centralised mechanism for paying GST, availing input tax credit and assessment. Accumulated input tax credit: The industry has accumulated input credit of approximately Rs 35,000 crore, which is severely impacting the cash flow status. Considering the present state of affairs, where any blockage of cash severally hampers the operations of the industry, refund of accumulated input tax credit should be allowed. It will help industry address its working capital constraints. GST on licence fees, spectrum acquisition charges and spectrum usage charges: The levy of GST on the abovementioned regulatory fees will be further compounding the working capital woes of the industry as it will add up to the existing massive pool of input credit. There is a dire need to declare that no GST is payable on these regulatory fees. Relaxation on import duties: Telecom service providers are required to continuously upgrade the infrastructure in order to keep pace with evolving technology and modernisation. The industry believes that at present, the domestic market is at a nascent stage and is yet to catch up with the quantitative and qualitative infrastructure requirement. The delta in demand and supply in the local market necessitates the requirement to import telecom equipment. Considering the financial health of the industry and the huge investments in the pipeline for upgrading the entire network system, relaxation in import duties deserves immediate attention. Availability of input tax credit of GST paid on telecom towers, shelters and other goods installed at tower site: Telecommunication towers and shelters are essential for provision of telecommunication services and are integral part of overall telecommunication infrastructure. The GST law should specifically allow the credit of GST paid on these towers. Disallowance of input tax credit of GST paid on towers and tower shelters is resulting in tax on tax, consequently increasing the cost of providing telecom services.
Undoubtedly, the finance minister has a daunting task ahead, and the hopes of the telecom industry and the nation at large are pinned on the proposed recommendations and framework. The telecom industry can hope that the winds of change blow in the anticipated direction.
Vishal Malhotra is Tax Leader for Telecom, Media and Technology at EY India. The views expressed are personal.