Spectrum auctions just got costlier for the mobile operators who are faced with the prospect of doling out a fortune to bag the airwaves in the auctions starting March 4. The operators will now have to shell out more because finance minister Arun Jaitley has brought all the government services under the 14% service tax net and this includes spectrum, too. Since the auctions are expected to fetch around R100,000 crore to the exchequer, the operators would have to pay an extra R14,000 crore as service tax.
At present, services provided by the government, except for a limited few, are exempt from tax by way of their inclusion in a negative list. The Finance Bill proposes that “all services provided by the government or local authority to a business entity, except the services that are specifically exempted, or covered under any other entry in the negative list, shall be liable to service tax.”
Experts said that with this change, even receipts under coal auction and the profit share that the government gets from oil and gas producers could be subject to service tax. The spectrum buyer would have to pay service tax to government upfront at the time of paying for the facility, but would eventually be able to take credit for the tax paid against its output tax liability. This would pose a cash flow issue to the successful bidders. Since companies could make a third of the payment in the first year, followed by a two-year moratorium and another 10 instalments, the tax payment to the government, too, would flow in accordingly. Receipts from spectrum sale and other communication services is estimated at R43,162 crore in 2014-15.
This is not the first time the government has made changes in taxation that caught private contracting parties on the wrong foot. In 2009, the government limited the seven-year income tax holiday for refiners to entities that started production before 2012 March.
Also, consumers could end up paying as much as 16% tax on many services with the Finance Bill 2015 seeking to give government the power to levy a 2% Swachh Bharat Cess on the “value of all or certain” services that will be notified. Since this cess is applied on the value of the service instead of the usual practice of applying it on the actual tax outgo, the rate would be as high as 16% on the items it is applied.
Experts said the changes in the service tax regime are geared towards implementing GST. “The Finance Bill makes a strong push towards the introduction of GST by increasing the rate of service tax and by curtailing the list of items on the exempted and negative lists significantly,” explained Pratik Jain, partner, Grant Thornton.
The Budget has also lowered or removed Special Additional Duty (SAD) on select imported items aimed at addressing the accumulation of Cenvat credit that businesses are unable to utilise. In industries where the value addition is less or the excise duty on the final product is low, a high SAD leads to the producer’s inability to use credit for the duty paid on the raw material to meet the output tax liability, explained R Muralidharan, senior director, Deloitte. This has led to accumulation of tax credits for many industries. The items that benefited from the cut include reed switch, diodes, transistors, capacitors and controllers for use in making pacemakers and parts for making tablet computers.