The retrospective amendments introduced in 2012, to widen the scope of process royalty to include payment for various transmission technologies, has severely impacted the domestic telecom industry as the definition appears to include payments towards provision of basic telephone/ internet service.
From the perspective of foreign telecom companies, this amendment was never intended to override the relevant treaty provisions, wherever beneficial. However, the amendment has added a shot in the arms of the tax authorities seeking to deny treaty benefits to genuine cases despite the judiciarys view to the contrary. Transactions hitherto considered as pure service arrangements commercially and also from tax perspective, like cross border telecom services, are dragged into the tax net under royalties, pursuant to the retrospective amendments and ignoring the beneficial treaty provisions.
The retrospective amendment also defies logic as the technologies enumerated in the definition were inconceivable in the 70s. The industry expects that the definition is made prospective and appropriate amendments are made to exclude standard telecom and data transmission services from the purview of royalty.
Taxation of discounts
Arrangements with market intermediaries (distributors, retailers, etc) for selling recharge vouchers, SIM cards, etc, is a standard industry practice. These arrangements are subject to significant litigation on applicability of withholding tax where the tax authorities treat them as one between Principal and Agent, thereby classifying the discounts as commission subject to tax withholding. Since the operators do not actually make payments to the intermediaries, the withholding tax levied becomes a sunk cost for the operators. It is, therefore, imperative that an appropriate clarification be issued on the non-applicability of withholding tax on discounts offered to the market intermediaries.
Investment-linked incentives to TISPs
With the TISPs being granted infrastructure status, investment-linked tax benefits should be extended to this sector which requires huge capital investments. Such an incentive will lower the cost of services and help in achieving the governments goal of providing affordable telecom services.
The Revenue Authorities have been denying CENVAT credit on infrastructural support equipments/ goods such as towers, shelters etc. on the premise that these neither qualify as capital goods nor as inputs as they are not used for providing output services.
A suitable clarification should be issued to expressly allow credit for duties and taxes paid on procurement of all infrastructural support equipments/ goods to telecom service providers or the tower companies.
Budget 2011-12 restricted the credit of certain input services including services required for construction of buildings, civil structures, etc. for most service providers including telecom companies. This has led to ambiguity regarding availment of credit on input services, required by telecom companies for erecting towers and other infrastructure at different sites.
A suitable amendment should be introduced to remove such restriction for telecom companies which require construction services for erecting towers and other essential infrastructure. In so far as civil construction related services are concerned, many a times construction of a property is essential for provision of output services. In such cases, credit should not be denied to the telecom companies.
Till recently, the telecom industry was a shining example of the great India story. While it may have lost some of its sheen, it still has tremendous potential to grow with a slight push from the government. Addressing the issues discussed above will be a step in the right direction. Perhaps, Budget 2014 could usher in the next big growth phase for the telecom industry.
With inputs from Sujay Paul, director (Tax), KPMG in India
The author is partner (Tax), KPMG in India. Views are personal