1. Budget 2016: The time is right to simplify the telecoms tax puzzle

Budget 2016: The time is right to simplify the telecoms tax puzzle

Budget 2016: It is imperative that the Government comes out with a clarification, as levy of VAT would add significant cost to an already tax laden telecoms sector.

By: | Updated: February 18, 2016 4:54 PM
Assocham said deeper tele-density and a quality service is critical to the government's Digital India programme, which has been launched to reach government services to the citizens through e-governance.(PTI)

Budget 2016: Hopes are high and the telecom fraternity is eagerly awaiting clarity on multiple tax issues and concerns in the Budget.(Photo: PTI)

As the 2016 Union Budget approaches, we have many open and unresolved tax and regulatory issues on telecom. Hopes are high and the telecom fraternity is eagerly awaiting clarity on multiple tax issues and concerns in the Budget.

But before we get to that – let’s rewind to 2015. It was a promising year for Indian telecoms that defined a newer phase of growth. We achieved the milestone of 1 billion subscribers. A big bang spectrum auction at the onset was critical for ensuring business continuity and providing a road-map to the industry. 3G witnessed mass adoption while 4G gained traction. Data-driven growth fuelled the smartphone phenomena and with it, the popularity of application and mobile commerce. Telcos forayed into Payment Banks to monetise on emerging trends and explore new business models. While the contentious issues of call drop and net neutrality took centre stage, the Government has taken pro-active measures to get it resolved. Towards the end of the year, the introduction of spectrum trading and sharing norms ushered the first wave of consolidation, and with it, a lean towards rationalisation. We are now amidst a radical transformation with the Digital India initiative.

What’s in store in 2016?
While all this is reassuring, in 2016 there are still many open ends that will need a wilful and emphatic closure. All eyes are on upcoming big ticket multiband spectrum auctions. The auctions will be critical for the telcos, given the thriving data demand and intensifying competition in the sector to grab a larger pie of the market share.

How the data story evolves would be another interesting thing to watch, considering that leading players have already launched 4G services in some key pockets of the market. Additionally, the entry of new players is also expected to bring disruption in the high-speed broadband market and further decline in data prices. The ability of 4G services to shake the existing market dynamics will hinge on a number of factors including price sensitivity, strength of the supporting ecosystem and the capability to deliver adjacent voice services.

As the world transitions into a digital era, big data is on the cards of being the next big thing to capture innovation and digital prospects. IoT Cloud services will minimise the need for human intervention especially with M2M connecting the entire value chain – from operations to delivering customer services. As companies continue to pour money into creating connected ecosystems, it will be exciting to see what other positive impacts will come in the year 2016.

On the policy front, India’s move towards adoption of new regimes such as Goods and Services Tax (GST) and IND-AS (Indian Accounting Standards) will have a major impact the telecoms sector in terms of implementation cost, transition and operation. In this context, further clarity on specific issues is needed such as determining the place of supply, credit mechanism, and the requirement of single registration. 2016 will be key year for the industry to seek clarification on impending changes in accounting and taxation rules.

2016 is expected to be a decisive year for the ambitious Government initiatives such as Digital India and Smart Cities. This transition, however, is not free from challenge with Cybersecurity emerging as one of the biggest concern. As the telcos store huge amount of personal information of customers, it is imperative to preserve the integrity and privacy of that data. This will continue to be an impending issue since cybersecurity breach incidents has significant negative impact on telcos, including financial damage, dent in reputation, customer loss, and share price drops.

The industry has high expectations in 2016 and is waiting to see some impactful action from the telcos which will help regain its position as a top performing sector.

However, in the run up to this announcement, let’s take a look at some of the industry’s most pressing tax and regulatory expectations.

Telecom tax bucket list for 2016
Fierce bidding to acquire prized spectrum has proved to be a huge cost for Telecoms. A clarification from the government that this spectrum is an intangible asset eligible for tax depreciation is much needed to bring certainty for the sector.

Clarity on indirect tax treatment of spectrum trading is also critical. The industry seeks to know whether consideration for spectrum trading would be liable to Service Tax or VAT or both. It is imperative that the Government comes out with a clarification, as levy of VAT would add significant cost to an already tax laden telecoms sector.  The industry also needs clarity on characterisation of payments made for trading/sharing and applicability of withholding tax on these payments

Telecoms do not consider distributors’ margins on sale of SIM cards and prepaid vouchers to be in the nature of ‘commission’, liable to withholding tax @10 per cent. The industry continues to face significant litigation on this issue and has been expecting the government to bring clarity on this issue for very long. Rationalising withholding tax rate on ‘commission’ may, in the alternate, reduce the cost burden for Telecoms, given that most distributors of telecom services in India operate in an unorganised sector, resulting in tax withholding to be a cost for Telecoms.

Next is the issue on accumulation of Education Cess (EC) credits. While EC and SHEC (Secondary and Higher Education Cess) have been subsumed in the increased rate of Service tax, the utilisation of its input credit against output Service Tax liability has been restricted to specific cases. It will be beneficial to have enabling provisions introduced to allow for the utilisation of entire accumulated balance of EC and SHEC.

Another key area of concern is the tax on entertainment services. In the current regime, while this is liable to Service Tax, the states also levy entertainment tax leading to dual levy for services such as DTH. Removal of such inconsistencies would be a welcome move.

We all have been hearing a lot about the Goods and Services Tax (GST). While this game changing reform is yet to witness nationwide implementation, a lot of areas have emerged that require clarity. The telecoms industry is hoping to see solutions to some of its key concerns in the upcoming budget.

The Swachh Bharat Cess has been a latest addition to the tax family. The industry awaits appropriate amendments and clarifications on the problem areas including allowing input credit on the cess, ambiguity on availability of Cenvat credit on passive telecom infrastructure, and taxability of Value Added Services amongst others.

On the critical issue of retrospective amendments, amplification of royalty definition and taxing indirect transfer of controlling interest has pushed the telecom companies into uncertainty and caused additional tax burden.

Introduction of Permanent Account Number for all non-resident payments is yet another burden, especially where the underlying contracts require the withholding tax burden  to be borne by the operators.

To conclude
In the words of Martin Luther King, ‘the time is always right to do what is right’. It is indeed the right time for strengthening the tax regimes and pushing the tax agenda forward.  We hope that 2016 will be the year of change with the Union Budget striking the right note, at ‘the right time’!

The author is partner – telecommunications practice, EY India 

(Views expressed are personal)

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