Budget 2017-18 What Telecom Sector expects from Jaitley : Deloitte

NEW DELHI: Finance Minister Arun Jaitley is all set to present the Union Budget for 2017-18 on 2nd February.This would be his third full-year Budget. So all eyeballs on his briefcase, what Jaitley is going to present for India.

Lets go through Deloitte’s pre-budget expectations from Jaitley for Telecom Sector.

Tax deductibility of Spectrum fees

Finance Act 2016 provides for amortization of spectrum fee for auction of airwaves in equal instalments over the period for which the right to use spectrum remains in force. The said section is applicable from AY 2017-18 i.e. FY 2016-17. The question arises on the appropriate tax treatment for spectrum fees paid in earlier years i.e. prior to March 2016.

In order to put to rest any controversy, it may be provided that the law has prospective application only and will not apply to acquisition of spectrum up to 31 March 2016. Additionally or alternatively, it may be provided that the spectrum is an intangible asset on which depreciation is available under section 32 and therefore telecom operators who have opted for such tax treatment are in conformity with the provisions of the law.

Tax withholding on distributors’ margin on sale of SIM cards and prepaid vouchers

Telecom companies sell prepaid cards / vouchers to Distributors at a discount who in turn sell to retailers for onward sale to subscribers. As per the current practice followed, no tax is deducted at source as telecom companies do not make any payment to the distributors as payment is received from them net of applicable discount which is very nominal and further as the discount is not in the nature of commission as arrangement with distributors is on Principal to Principal basis. On the contrary, the tax authorities allege that the distributors are agents and treat the discount as commission and apply TDS @10%.

It is recommended that no TDS should be applicable to such discount or the burden be reduced to 1% as against 10% as currently applied.

Characterization of telecom services as ‘Royalty’

It has been upheld in a number of decisions that telecommunication services are standard services and therefore cannot be treated as Royalty under the provisions of the Act and the tax treaties entered into by India with various countries. The Finance Act, 2012, retrospectively amended the definition of ‘Royalty’ to include within its purview, transmission by satellite, cable, optic fibre, or similar technology. It has also been clarified that payments in respect of all rights, properties and information are in the nature of Royalty irrespective of any actual possession or control or direct use of the same.

It should be clarified that such services do not qualify as Royalty and amendments made by finance Act 2012 be amended retrospectively.

Tower Companies

Definition of industrial undertaking in Section 72A of the Act should be amended to include Tower infrastructure companies to allow set off and carry forward of losses of tower companies. This will help in consolidation in the sector and reach economies of scale.

Accelerated Depreciation should be provided on IT and Telecom Hardware Products

It is recommended that depreciation on computers and computer software should be retained at the current rate of 60% on computers. Further, Telecom Hardware products have also same or shorter life as computers and therefore it is recommended that rate of depreciation in relation to computers, and IT & Telecom Hardware products should also be enhanced.

Benefit of Investment Allowance under section 32AC should be extended to other sectors including telecom infrastructure service providers

Currently this investment allowance is meant for a company engaged in the business of manufacture of an article or a thing. Other sectors like developing and building an infrastructure facility, telecom infrastructure service providers, creation of broadband facility etc. are equally important and the investment allowance should be allowed to such companies to enable them to plough back the cash for further investments in the sector which is important when Government is making significant efforts to push the digital payments and other e-initiatives.

CENVAT Credit on input services

Telecom Towers, shelter, electric generator are necessary items of a passive telecom infrastructure which are erected on solid concrete civil foundation. Construction of civil foundation at telecom site is a legitimate business expense and it is an essential part of passive telecom infrastructure which requires substantial investment. Accordingly, inclusion of construction of civil foundation work, in the context of setting up or installation of telecom tower, in the definition of “input service” in Rule 2(l) of CENVAT Credit Rules for CENVAT purposes.

CENVAT Credit of diesel

CENVAT on diesel was earlier denied as it was heavily subsidized by the government and the government did not want to give dual benefits of subsidy and CENVAT to diesel consumers. However, over the last one year, the government subsidy in diesel has almost been fully eliminated. Therefore, the only rationale for not granting the CENVAT credit on diesel is no more in existence. Inclusion of diesel in the definition of “inputs” in Rule 2(k) of CENVAT Credit Rules for CENVAT purposes.

Service Tax Applicability

· The service tax credit should be allowed under Rule 6(3) of STR, 1994 in case of waiver of recovery of service fees for any business reasons;

· The service provider would need to pay service tax on raising the invoice though he has not received service tax/fee amount from clients;

· The non-grant of service tax credit under Rule 6(3) of STR, 1994 in genuine cases would result into loss to the service provider and affects the cash flow of the service provider.

Hemant Joshi, Partner, Deloitte in India