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View : Telecom sector avidly looking for its booster shot from Budget 2022

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View : Telecom sector avidly looking for its booster shot from Budget 2022

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The telecommunication industry in India is the second-largest in the world with a subscriber base of 1.17 billion. The growth in the telecom sector has been facilitated by liberal policies of the Government that provides an amicable regulatory framework for offering telecom services to Indian consumers at affordable prices. The sector is now eying the Budget 2022 to garner further support from the government on various tax and policy-related matters.

View : Telecom sector avidly looking for its booster shot from Budget 2022
Amidst the uncertainty poised due to the outbreak of pandemic in the country, the telecom sector has proven itself as a knight in the shining armour for the Indian economy. The sector has not only carried the responsibility of transitioning India into a digital economy but also played a significant role in maintaining the momentum during difficult times.
The telecommunication industry in India is the second-largest in the world with a subscriber base of 1.17 billion. The growth in the telecom sector has been facilitated by liberal policies of the Government that provides an amicable regulatory framework for offering telecom services to Indian consumers at affordable prices.
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The Government, to boost growth, competition and to address the liquidity crunch of telecom players, has recently approved various structural and procedural measures for the sector. The Government has not only rationalised the calculation of ‘Adjusted Gross Revenue’ (‘AGR’) but has also substantially reduced the bank guarantee requirements and interest rates on delayed payments of license fee, among other measures. Further, allowing 100% FDI under the automatic route has unlocked access for the distressed sector to raise funds from international sources.
Pursuant to the aforementioned developments, the sector is now eying the Budget 2022 to garner further support from the government on various tax and policy-related matters.
The Telecom sector being capital intensive has witnessed an upside in the required investment in core infrastructure to render uninterrupted services which are pivotal in the unwrinkled functioning of other sectors of the economy. Considering that the domestic ecosystem to manufacture telecom gears is still in the nascent stage, the sector is primarily dependent on the import of such equipment to serve the domestic requirements. Further, the escalation in the rates of customs duties on the import of core equipment to promote the initiative of ‘Atmanirbhar Bharat’ has increased the landing cost for the telecom service providers. On the other hand, the accumulation of input tax credit under GST has further added to the woes of the sector. Presently, an estimated working capital of Rs 35,000 crore is blocked due to the accumulation of input tax credit in telecom players.
Given above, in order to liquidate the congested working capital, the industry is yearning for some precipitate measures from the policymakers. The alternative of either allowing the refund of accumulated input tax credit or enabling the adjustment of the same against other statutory levies would propel the growth of this sector. Moreover, the introduction of provisions under GST to set off the payment of GST liability on statutory levies such as usage of spectrum charges, license fee etc. by using input tax credit would also be a welcome move for the sector. Further, there is a demand to roll back the increase in GST rate on Mobile phones from 18% to 12%, keeping in mind the need to convert a major population percentage from feature phones to smartphones.
In addition to the above, to fuel the ambition of making India an export hub for 5G gears, the Government has recently planted the seed in the form of a Production Linked Incentive (PLI) scheme for the telecom sector. The scheme had a total outlay of Rs 12,195 crore and is aimed to incentivize the domestic manufacturing of telecom equipment. However, as highlighted, till the time domestic market is equipped enough to meet the rising demand, it is essential to slash the custom duties on the import of core equipment. This would enable existing telecom players to pragmatically chalk out the deployment of 5G which is vital to complement the irreversible transition to virtual ways of working.
Further, curb in unwarranted litigations and reduction in excessive regulations/ compliance is what the industry is awaiting from both direct and indirect tax perspective. The dispute regarding non-classification of trade margins extended by telecom companies to distributors as ‘commission’ thereby resulting in non-applicability of tax withholding provisions thereon, is pending from a long time and warrant necessary clarification from the authorities in order to cut down on long-pending litigation. On the indirect tax front, the issue in relation to the denial of input tax credit on equipment used in passive infrastructure by treating the same as telecom tower is persistent. Further, regularisation is required on the applicability of entertainment tax on online content consumed via internet.
For ease of doing business, the introduction of centralised audit and assessment for telecom service providers under GST is a persistent demand. In addition to the same, rationalisation of 2012 retrospective amendment in ‘royalty’ definition under the income tax law, to include charges for transmission services by satellite, cable, optic fibre, etc. is another area which demand immediate attention. This amendment has been extensively used by the Authorities for raising withholding tax demands on IUC payments, connectivity charges and roaming tariffs paid both to Indian and overseas telcos.
The role of the telecom sector in sustaining through the recent unprecedent times of COVID 19 cannot be neglected. Also, the government is betting on this sector for its other initiatives like smart cities project, digital India etc. which makes it more than necessary to address the current areas of relevance for the telecom sector in India. With the people getting booster shot amidst the third wave of COVID in the country, it would be interesting to see whether Budget 2022 will provide the much needed booster shot to the telecom sector.
-The author Bipin Sapra is Tax Partner - Indirect Tax Services at EY. The views expressed are personal.
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