Column: Ring in change with the budget

Jun 28 2014, 02:22 IST
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SummaryThe government must announce a host of tax reforms in the budget if the telecom sector is to regain vitality

Over the last couple of decades, the telecom industry has undoubtedly been one of the key drivers of economic and social development in India. Besides contributing about 3% to India’s GDP, the industry has provided direct employment to millions, fostering the growth of several allied industries and putting India on the global platform by revolutionising the way information is transmitted. Riding the wave of high capital infusion and a booming market, the industry surged ahead by leaps and bounds. However, the industry has been witnessing sluggish growth in the last couple of years. Saturation of the fixed line and wireless markets coupled with a large number of players operating in all major circles has hammered the margins, creating an urgent need for consolidation in the marketplace. Policy indecisiveness and lack of clarity and certainty in fiscal laws have also added to this downturn. A decisive mandate to the NDA government at Centre comes with the expectation of the telecom industry that the former will put it back on the growth trajectory—a fair expectation from an industry that contributes ~26% of its revenue to the government by way of licence fees, spectrum usage charges, taxes and other levies. The upcoming Budget is undoubtedly the right opportunity for the government to introduce some bold measures to achieve this end.

Retrospective amendments

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 judiciary’s 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

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