Budget 2017: Telecom industry waiting for Narendra Modi government to dial the right tax code

New Delhi | Published: January 10, 2017 6:24:38 AM

India’s growth story has been nothing short of inspiring over the last few years. Positive policy reforms and growth-oriented initiatives have put the economy on an upward trajectory.

Expenditure incurred for acquiring a ‘right to use spectrum’, is in the nature of a business or commercial right enabling the telecom operators to use the acquired spectrum over a period of 20 years. Expenditure incurred for acquiring a ‘right to use spectrum’, is in the nature of a business or commercial right enabling the telecom operators to use the acquired spectrum over a period of 20 years.

India’s growth story has been nothing short of inspiring over the last few years. Positive policy reforms and growth-oriented initiatives have put the economy on an upward trajectory. Asia’s third-largest economy, it has witnessed a dramatic shift that boasts of favourable economic conditions and improved ease of doing business. Staying true to its new identity, India emerged as the world’s fastest-growing major economy, outpacing China, earlier this year. Clarity on several regulatory logjams have been instrumental in driving this. With the introduction of GST, India is all set for one of the biggest makeover of its tax system.

While all this is encouraging, India’s mobile revolution is difficult to ignore. Recognised as the world’s second largest telecoms market globally, the emergence of a new ‘Digital India’ is set to transform the lives of its 1.25 billion citizens. A surging cashless economy in the wake of the recent demonetisation measures, India is all set to embrace the next phase of growth from mobile-first services and spread across health, education, finance, retail and governance.

Yet, as Indian telecoms look forward to this radical transformation, it continues to loom under a massive debt trap and stressed margins. High taxes and levies in the form of access charges, license fee, sales and service tax, customs duty, entry tax and corporate tax currently account for nearly 30% of the gross revenues of telcos. Having said that, for India’s highly taxed telecoms sector that will play a pivotal role in enabling the creation of a ‘Digital India’, all eyes are now on the Union Budget 2017 for seeking an empathetic closure on some of the sector’s most pertinent issues.

Clarity on tax treatment of payments made towards acquiring ‘right to use spectrum’ before April 1, 2016

Expenditure incurred for acquiring a ‘right to use spectrum’, is in the nature of a business or commercial right enabling the telecom operators to use the acquired spectrum over a period of 20 years. This expenditure was being capitalised by the telecom operators as an ‘intangible asset’ and tax depreciation was being claimed thereon under section 32 of the Act.

The Finance Act, 2016 introduced Section 35ABA with effect from April 1, 2016 to provide for amortisation of expenditure incurred for acquisition of ‘right to use spectrum’ over the tenure of the right. With the introduction of section 35ABA, tax position as regards acquisition of ‘right to use spectrum’ stands settled post April 1, 2016. However, ambiguity on taxation of these payments made prior to April 1, 2016 is still open, i.e., whether the consideration shall be amortisable under section 35ABB (which provides for amortisation of payments made only towards acquisition of a ‘telecom license’) or eligible for tax depreciation under section 32.

It is an accepted fact that ‘right to use spectrum’ and ‘telecom license’ are two distinct classes of rights/assets. The National Telecom Policy, 2012 issued by the government has delinked Telecom License and Spectrum, the bidding terms for 3G spectrum also clearly provide that spectrum is distinct from a telecom license. This distinction is also evident from the provisions of the Income tax Act itself, where different sections have been enacted for treatment of right to use of spectrum and telecom license. Telecom industry shall, therefore, welcome a clarification from the government that the expenditure incurred towards ‘right to use spectrum’, which was acquired before April 1, 2016 would be depreciable under section 32 of the Act.

Characterisation of payments in context of withholding tax

Clarification from the government on the definition of ‘royalty’ to exclude telephony, interconnect charges and internet bandwidth, shall avoid the increase in cost of telecom services for Indian telecom operators and end-consumers. Industry has been seeking clarity from the government on characterisation of payments made by telecom companies including for standard telecom services, as industry players continue to face litigation on this issue, more particularly post the retrospective amendment made to Section 9 by Finance Act, 2012.

On another aspect, 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. The industry continues to face significant litigation on this issue and has been expecting the government to bring clarity for very long. Further, rationalising the withholding tax rate on ‘commission’ (to say 2% from the current 5%) may, in the alternate, reduce the cost burden for telecoms, given that most distributors of telecom services in India operate are in an unorganised sector, resulting in tax withholding to be a cost for telecoms.

Taxation of embedded software

Telecom industry has been facing considerable litigation around taxation of payments for supply of finished telecom products with embedded software (such as mobile handsets, telecommunication equipment etc.) from outside India. Indian tax authorities have been arbitrarily allocating 30-40% of the payments from supply of finished telecom products towards embedded software and taxing the same as ‘royalty’ in the hands of the foreign suppliers. Software embedded in telecom products form an inseparable part of the hardware and is required to operate the product. This is true for any electronic/ IT product in today’s world. Such a tax treatment is not only arbitrary but also contrary to international principles for taxation of software. Indian courts have also, on multiple occasions supported the view that such split of software is misplaced and further, have also held that these payments are no taxable as ‘royalty’. The view adopted by the Indian tax authorities has led to widespread litigation and a clarification from the government in this regard would be a welcome step to settle a large number of cases, more particularly in the telecom sector.

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Other asks

To foster the creation of a robust tax environment, urgent measures need to be adopted on several fronts. With Union Budget on the anvil, the telecom industry hopes for constructive reforms on some of the other impending issues:

Relaxation in scope of special audit to cover only exceptional circumstances when there is a clear evidence of complexity in accounts or cases where the books of accounts are not audited under the Companies Act.

Reduction in time period involved in issuance of lower/nil withholding tax certificates, with an online mechanism for issuance of such certificates provided to the tax payer himself (within an overall limit and withholding tax rate provided by the Income tax authorities to the tax payer).

Expeditious processing of refund claims and issuance of refunds within one year from the end of the financial year in which the return is filed.

The annual Union Budget is one of the most critical development in the economic calendar of India. The telecoms sector hopes that government will continue the momentum of reducing bottlenecks and introducing growth oriented reforms to support the sector’s growth and viability and reduce litigation, which continues to impact most telecom companies in India.

The author, Garima Pande is tax partner, EY India. Views are personal

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