Budget 2013 - Telecom yearns rational tax environment

In the recent years, the telecom sector has unquestionably emerged as one of the key drivers to the growth of Indian economy. However, the increasing competition between the players is certain to affect the business dynamics of this sector. As massive growth is expected on account of additional consumer base and emergence of the market for value added services, a favourable Budget can further boost the progress.

The countdown to Budget 2013 has begun and the telecom sector awaits the cushion of a rational tax environment both at the national and state levels. Some of the key expectations include:

Reduction of rate of TDS on margins of market intermediaries of pre-paid vouchers and on payment for roaming charges:

While selling pre-paid products, most telecom operators enter into ‘principal to principal' arrangements with the intermediaries. However, tax authorities often treat intermediaries as agents of telecom operators thereby alleging that difference between the Maximum Retail Price (MRP) and the price at which it is made available to the intermediary is in the nature of commission and accordingly, tax @ 10% should be withheld on the margin allowed to the distributor. This has resulted in unnecessary litigation and is causing financial hardship to telecom operators. Accordingly, the withholding requirement may be abolished or restricted to 1% as opposed to the current 10%.

Withdrawal of retrospective expansion of definition of ‘Royalty' and ‘Process':

Finance Act, 2012 (FA 2012) introduced retrospective amendment to the definition of "process" which is now deemed to include transmission by satellite, cable, optic fibre, or any other similar technology including uplinking, amplification, downlinking of signals. This may result in inclusion of payments made by Indian telecom operators to other service providers for international private leased‑line circuits, satellite usage charges, etc. The above amendment could also be interpreted to bring within its ambit, payments made by telecom operators to other operators for interconnect, roaming, etc, which would result in significant litigation for the telecom operators in India. Accordingly, the expanded definition of "Royalty" should be withdrawn and even if the same is retained the change should be made prospectively.

 

Section 40(a)(ia) of the Income Tax Act - Disallowance of expenditure on non-deduction of tax on payment:

Expansion in definition of royalty will lead to disallowances under section 40(a)(ia) of the Income Tax Act for payments made by telecom operators in past years to nonresident service providers. The rationalisation to section 40(a)(ia), made by FA 2012 has been made only with respect to payments made to residents. However, the same should be made applicable to payments made to non residents, as well to ensure that litigation for Indian telecom operators could be reduced.

Further, Indian tax laws do not prescribe a statutory time period/ limitation for initiating withholding tax proceedings against a person who fails to withhold tax on payments to nonresident service providers. A reasonable limitation period should be made applicable for initiation of withholding tax proceedings under section 195 of the Income Tax Act (i.e with respect to non resident payments) against the person responsible to deduct taxes from even payments to nonresidents.

Clarification on tax treatment of upfront 3G spectrum fees and auction based one-time spectrum fees paid:

The telecom industry has made substantial payments to acquire the right to use 3G spectrum for provision of telecommunication services. As regards deductibility of the amount paid for the ‘right to use 3G spectrum', there is lack of clarity whether the same should qualify as ‘intangible asset' (and eligible for depreciation at the rate 25 percent on written down value under section 32 of the Income Tax Act) or as 'expenditure for obtaining telecommunication license' (and eligible for amortisation in accordance with section 35ABB of the Act). Similarly, auction based one-time spectrum charges would also be payable by most telecom operators and the deductibility of the same could also result in tax litigation for telecom operators. A specific amendment/clarification should be provided to address the tax treatment of upfront 3G spectrum fees and one-time spectrum fees.

 

Amendment in Section 43A of the Income Tax Act:

Currently, the foreign exchange fluctuations on borrowings in foreign currency to purchase capital assets are adjusted against the cost of the capital asset only if the capital asset has been acquired from a foreign country. In case the capital asset is purchased from India, the exchange fluctuation on the foreign borrowings in a dead gain / loss with no tax treatment.

In order to enable telecom operators to raise funds for payment of upfront fees towards 3G Spectrum, External Commercial Borrowings guidelines were amended to allow them to raise upto USD 500 mn from abroad. Under current provisions of section 43A exchange fluctuation loss/ gain on ECB for acquisition of 3G spectrum cannot be adjusted against the cost of the 3G spectrum. Thus, government should being out specific amendment in Section 43A with respect to deductibility/ taxability of foreign exchange fluctuations on ECBs arising on account of increase/reduction in liability incurred for payment of 3G spectrum fee.

Benefit of Section 194LC of the Income Tax Act may not reach telecom operators: Section 194LC provides for tax withholding at a reduced rate of 5% on payment of interest by an Indian company to a non-resident in respect of borrowings made in foreign currency, subject to satisfaction of certain conditions or on a specific approval. One of the conditions prescribed state that any rate of interest within ‘all-in-cost' ceiling specified by the RBI under ECB Regulations would be the approved rate of interest for the purpose of lower withholding under section 194LC. Given the current state of telecom industry, it is extremely difficult for the operators to raise foreign currency loans within the prescribed ‘all-in-cost' ceiling for interest rate. Accordingly, provision of a separate threshold of interest for telecom operators, rather than applying the standard "all in cost" ceiling, would ensure that telecom operators can also benefit from provisions of section 194LC.

The key expectations on indirect tax front continues, with addition of a few more to list on account of introduction of negative list regime and the Place of Provision of the Service Rules, 2012 instead of erstwhile export and import rules.

 

Cenvat credit on telecom towers, shelters and other goods installed at tower site:

The Excise duties paid on these goods are availed as Cenvat credit, which is used for discharging Service tax liability by the operators/ tower companies. Recently, the authorities have started taking a discriminatory stand by disallowing such credit and confirming demands. These goods are essential for creating the passive infrastructure required for providing telecom services and constitute a major portion of the total investment made by a telecom service provider. Denial of credit on these goods by the authorities not only leads to litigation and blockage of funds but also defies the basic principles of the Credit Rules. Accordingly, appropriate amendment should be made in the Cenvat Credit Rules to clearly allow credit of the said goods to the operators/ tower companies.

Special Additional Duty on import of telecommunication equipment:

The telecom service providers are not entitled to avail credit of special additional duty (SAD), paid on import of network equipment. Accordingly, the non creditable SAD becomes an added cost to such service providers. An amendment should therefore be brought to either exempt SAD or make the same creditable. The said amendment would not only reduce the capital cost but also help in faster rollout of telecom network especially in the rural sector.

Levy of SAD on trading of goods by SEZ units:

 

Exemption from levy of SAD on clearance of goods from SEZ to Domestic area (DTA) is available only in respect of goods manufactured in a SEZ. However, for traders, such an exemption is presently not available. In view of the same, clearance of telecom goods as such from SEZ to DTA is subject to SAD (which is in lieu of VAT) and VAT/ CST, which leads to dual levy of VAT and SAD on the same transaction. Given the intent of legislature, it is clear that SAD and VAT/ CST should not be levied together on the same transaction. Accordingly, outright exemption from the levy of SAD should be introduced to avoid dual levy of VAT/ CST and SAD for trading of goods from SEZ to DTA.

IPLC/ MPLC service - location of service recipient under the Place of Provision of the Service Rules (POPS Rules):

In case of leased line connectivity services such as International Private Leased Circuit (IPLC) and Multiuser Private Leased Circuit (MPLS), the determination of location of service recipient subsequent to the introduction of POPS Rules under the negative list regime is a point of debate. The multiple clauses in the definition of the "location of the service recipient" create an ambiguity on what will be the situs of the service recipient. Consequently, the determination of the place of provision of IPLC/ MPLS services under the POPS Rules to ascertain Service tax levy may initiate one more front for litigation. It is suggested that specific clarifications prescribing location of the contracting party as the location of the service recipient should be issued.

Taxability of Value Added Services (VAS) - whether service or goods:

The ambiguity on taxability of VAS which includes on-line gaming, caller tunes, news, ringtones, etc. still continues because of the overlapping scope of both Service tax and VAT legislation. This has resulted into litigation as the "content" supplied under VAS in most of the scenarios qualifies within the meaning of "service liable to Service tax" as well as "goods liable to VAT/ CST". It is suggested that the resolution to this matter be provided by specifying that VAS attract only Service tax or VAT/ CST.

 

Introduction of General Rules of Origin (ROO):

ROO serve several purposes. They help to determine the country of origin of the goods which is now a mandatory requirement to be mentioned on a bill of entry for import of goods. ROO also help determine whether particular goods will enjoy a lower rate of duty under Trade agreements, or would the same be subject to anti-dumping duty. Due to absence of general ROO to determine the originating country, there is no clarity on determination of originating country for claiming the benefits under trade agreements or for imposition of antidumping duties. The same assumes even more importance in view of certain recent anti dumping duty levied on equipment including SDH equipments, used for telecommunication network. Therefore, it is essential that transparent and general ROO are in place.

License fees and other levies:

Though this has been an Industry wish list for many years, the telecom industry is subject to numerous taxes and levies which takes away the affordability. As in most of the developed countries, a single levy closer to the rates of approximately 0.5-2% would give a much awaited boost to the telecom sector and shall help in provide cheaper services across the country.

The importance of the telecommunication industry in our economy requires no deliberation. Harsh tax policies not only threaten the profitability of the industry but also deter the development of the solitary parts of the country. The Government should endeavor to make best use of the tax policies to stimulate growth in this sector.

(Views expressed are personal)