Wins for Telecom Players?

By Vishal Malhotra

Union Budget 2014 was announced on July 10, 2014 by India’s Finance Minister amid fierce tide of socioeconomic expectations. From proposing measures to curb inflation to abridging fiscal deficit, multi-dimensional challenges were to be dealt by the maiden budget of the new government. With an agenda to reinforce investor confidence, Union Budget 2014 contained various proposals for development of various sectors of economy.

Though no specific reliefs have been sanctioned for telecom sector, the bigger picture seems to be positive and balanced. Announcements like allocation of Rs 500 crore towards ‘Digital India’ program which was launched to ensure broadband connectivity at village level and integration of all Central Government Departments and ministries through eBiz platform for providing single portal clearances are positives for growth of telecom industry. As far as tax proposals are concerned, the offerings envisage a paradigm shift in policy making thought process.

Direct Tax Proposals

Retrospective amendments: Many retrospective amendments were introduced by Finance Act 2012 which was not very well appreciated by the telecom industry. One the most intriguing amendment included in series of such retrospective amendments was the change that attempted to clarify that even indirect transfers triggered by change in shareholding of overseas entity are taxable in India. This added to the uncertainty and litigation exposure looming large on most business houses in India. Repealing retrospective effect of such amendment was one of the most sought after proposals.

As observed in Election Manifesto, in his budget speech as well, the Finance Minister reaffirmed that new government is committed to provide a stable and predictable taxation regime that would be investor friendly and spur growth. It was also observed that though power to make retrospective legislation is a sovereign right of the Government but the same has to be exercised with extreme caution considering its impact on economy and the overall investment climate. With such prelude, what was expected was an overturn of retrospective amendment.

Though such expectation did not turn into reality, it is proposed that a High Level Committee shall be constituted by Central Board of Direct Tax (apex tax regulator) that shall scrutinize fresh disputes arising out of retrospective amendments in respect of indirect transfers. Hopefully, the committee would review the cases with greater judiciousness and in accordance with the true intent of the income tax provision rather than adjudicating such serious issues on preconceived notions.

Foreign dividend: Finance Act 2011 had introduced concessional tax rate of 15 percent on dividend income received from foreign subsidiaries. This provision was introduced to provide an incentive to Indian companies having offshore investments and accelerate repatriation of foreign earnings. Such benefit was made available till March 31, 2014. Union Budget has removed the sunset clause and benefit of concessional tax of foreign dividend has been perpetually made available to Indian companies. Telecom companies having overseas investments would be greatly benefited from this amendment.

Dispute resolution: Significant tax demand is under dispute and litigation before various Courts and Appellate authorities. This has stirred investor confidence and a need is realized to propose measures for bringing tax certainty. As a part of legal and administrative reforms, Finance Minister has proposed following steps to avoid litigation and to repose taxpayers’ faith in dispute resolution forums:

Widening scope of AAR: Currently, a binding ruling can be obtained from Authority for Advance Ruling (‘AAR’) on question of law or fact arising out of any transaction/proposed transaction which are relevant for the determination of tax liability. However, as per existing provisions, such ruling can be obtained only by a non-resident or public sector undertaking. It has been proposed to extend the scope of advance ruling so that even resident taxpayer can also apply for such ruling. However, Central Government may notify the class and category of residents eligible for the same. It is also proposed to constitute additional benches for strengthening the AAR.

Enlarged scope of Settlement Commission: It has been proposed to enlarge the scope of Settlement Commission. As per the existing provisions, application cannot be made before Settlement Commission by the taxpayer if reassessment proceedings are pending before the tax officer. Such limitation was introduced by Finance Act 2007 and the same has now been proposed to be removed from the statute.

APA rollback: In past few years, transfer pricing litigation has increased exponentially in India. In order to reduce such litigation and provide certainty to the taxpayers, Advance Pricing Agreement (‘APA’) provisions were introduced in India in 2012. Under such provisions, the taxpayers could enter into an APA agreement for a period not exceeding 5 years with the Government of India for determination of arm’s length price (ALP) of its international transactions.

Recognizing the need to strengthen the APA programme further and align it with global best practices, “roll-back” provision in the APA programme has been introduced. Under such provisions, an APA entered into covering a future period may also be applied to international transactions entered into by a taxpayer during any prior periods (not exceeding four years) preceding the first year for which the prospective APA is applicable.

Given the complex nature and significant volume of inter-company transactions undertaken by Telecom companies, introduction of APA roll back provisions have been hugely welcome as the APA programme will provide certainty for a total period of 9 years (4 previous and 5 in the future) to the taxpayers. The conditions, procedure and manner of covering the APA results for the prior periods under the roll-back mechanism are yet to be prescribed.

However, one hopes that the roll back provisions will enable the taxpayers to settle and resolve their pending transfer pricing disputes before tax courts in India and will not be restricted to tax years not audited by tax authorities in India.

Implications of withholding tax default Existing provisions of Income tax places onerous implications on withholding tax defaults. Besides, levy of interest and penalty on such default, one of such implications is that entire expense on which tax has not been deducted (or after deduction has not been deposited) is not allowed as deductible expense. Such provisions are very harsh as genuine business expenditure also gets disallowed merely due to non-deduction of a miniscule amount of tax. Realizing such harshness and in order to provide relief to the taxpayer, it has been proposed that the disallowance shall be restricted to 30 per cent of amount of expenditure claimed in case of non-deduction or non-payment of withholding on payments made to residents.

Such proposal has brought significant relief to telecom sector which is currently dealing with withholding tax controversies involving substantial amounts. Such controversies have emanated from disagreement between taxpayer and revenue on legal and interpretational issues such as requirement of withholding tax on margins earned by distributors on resale of prepaid vouchers or payment made to telecom infrastructure service providers.

Though such expenses are allowed as an expense if taxes are deposited later on or in case it can be demonstrated that recipient of such income has paid taxes thereon on his own account, restricting amount to be disallowed at 30% of expense would definitely be considered as great relief for the telecom industry.

Indirect Tax Proposals

Introduction of GST: The Finance Minister expressed his commitment to introduce GST legislation in a year. Most telecom players have a nationwide business presence and are optimistic about the slated GST regime providing a rationalized taxation system.

Cenvat credit rationalization: The condition for payment of value of service for availing credit has been done away with in respect of 100% reverse charge services. Further, re-availment of credit, initially reversed on account of non-receipt of export proceeds within specified period, has been permitted provided such proceeds are received within one year from specified period.

Taxes on Telecom Products: Exemption from payment of Basic Customs Duty on import of certain specified telecommunication products, except those covered under the Information Technology Agreement, has been withdrawn. This step is likely to increase the cost of building telecom infrastructure and adversely affect the entire sector. Further, withdrawal of exemption from payment of Education cess and Secondary & Higher Education Cess leviable on Counter Veiling Duty on certain electronic products including mobile phones is being seen as another dampener.

Administrative reforms: Few amendments, although made applicable to service industry at large, may also adversely impact already stressed Telecom sector. Significant dampeners include imposition of time limit for availing credit in respect of inputs and input services, imposition of higher rates of interest for delayed payment of Service tax and mandatory pre-deposit for filing appeals before Commissioner (Appeals) and Tribunal.

Overall, this budget has genuinely attempted to soothe sourness developed between taxman and telecom industry, yet few measures have nearly missed fastest growing industry in India in recent times. On a holistic basis, there are positive signs of promoting investment potential and business ecosystem of the country in this budget and that should afford some boost to telecom sector as well.

(Vishal Malhotra is Tax Partner – Telecom Practice, Ernst&Young)