Tax charges over Rs 14,000 Cr likely to be pressed against Bharti Airtel and Reliance Jio, predicts Kotak

Reliance Jio might potentially face a tax demand of Rs 8,400 crore, according to analysts at Kotak Institutional Equities, while Bharti Airtel could potentially face a tax demand of Rs 60 crore for the years 2020 to 2023.

Analysts predict that Bharti Airtel and Reliance Jio could be subject to tax claims totaling more than 14,000 crore as a result of the Supreme Court's recent ruling on the classification of licencing fees. The licence fee was ordered to be treated as capital under the terms of the judgement, changing its former classification as an expense.

Reliance Jio might potentially face a tax demand of Rs 8,400 crore, according to analysts at Kotak Institutional Equities, while Bharti Airtel could potentially face a tax demand of Rs 60 crore for the years 2020 to 2023.

According to Kotak,"At first glance, the accounting adjustment would result in greater EBITDA/PBT, lower cash flow, and higher initial tax expenses, but it is anticipated that these effects would balance out over the course of the licence holding period. We think the income tax authority would demand payment for the back taxes owed, in addition to any applicable fines, which might have a large one-time effect. Telcos should submit a review petition."

"Assuming an 8% tax rate on a licence fee (of adjusted gross revenue, or AGR), the potential impact on cash flows would be 2% of revenues (equivalent to 4% of EBITDA) on a gross basis in the near term. However, this impact would be mitigated by higher depreciation and amortisation costs in subsequent years, limiting the net impact to a much lower number. Companies with historical losses would have the ability to somewhat offset this immediate effect. As a result, we think the impact is rather manageable," wrote Morgan Stanley analysts in a research.

In the fiscal year that ended in March 2023, the Indian telecom industry generated gross revenues of around 3.1 trillion rupees.

Additionally, Kotak noted that the tax outlay would decrease over time as amortisation advantages accumulated and that the overall tax burden would be roughly comparable throughout the licence period.

"For telcos, which have completed the initial 20 years of the license, the past tax shortfall would likely pertain only to the difference in payment timings and change in tax rate, in our view. However, there could be a significant impact of tax shortfall if 1) the telco is still to complete the initial 20-year license period or 2) for the period after license renewal. We have not incorporated potential tax liabilities for telcos in our model, as we await more clarity on the actual amount and potential penalties (if any). Furthermore, we believe telcos would likely file a review/curative petition in this case and the actual tax liability (if any) could get delayed." Kotak added.

The annual licence fee that telcos must pay is now considered a capital expenditure rather than a revenue expenditure by the Supreme Court (SC). The Dec 2013 Delhi High Court ruling that the annual licence fee is a revenue expenditure is overturned by the SC decision. Licence payments are now considered an expense by telcos and are therefore tax deductible. Nevertheless, following the ruling, the licence cost would have to be considered a capital item and amortised over the licence duration.

On the BSE, Bharti Airtel shares ended the day 0.94% higher at 954.4 per share.