GST for Telecom Needs Fur­ther Tun­ing

The pro­posed GST must en­sure that the rates of taxes are low on ser­vices as well as mo­bile hand­sets in or­der to en­sure af­ford­abil­ity of telecom ser­vices and the highly pro­duc­tive rip­ple ef­fect on In­dia’s GDP.

Voice&Data - - FRONT PAGE - Anal­y­sis Bipin Sapra (The au­thor is Tax Part­ner, Telecom Prac­tice, Ernst & Young. Views ex­pressed here are per­sonal) vndedit@cy­ber­me­dia.co.in

The tele­coms in­dus­try in In­dia has scaled dra­mat­i­cally over re­cent years to be­come one of the coun­try’s big­gest suc­cess sto­ries. It is the world’s sec­ond largest wire­less mar­ket with over a bil­lion sub­scribers and is set to be­come the sec­ond largest smart­phone mar­ket, over­tak­ing the US; with fore­casted 320 mil­lion smart- phone con­nec­tions by 2016. Tele­coms sec­tor has rev­o­lu­tion­ized lives of peo­ple; the way very few could have imag­ined a decade back. The mo­bile phone has played a won­der­ful role in help­ing the large part of In­dia to progress to­wards glob­al­iza­tion. Com­mu­ni­ca­tion is the essence of evo­lu­tion and now that we have got peo­ple talk­ing and stay­ing con­nected, we are mov­ing onto

The fore­most con­cern, also pointed by the Chief Eco­nomic Ad­vi­sor, Arvind Subra­ma­nian, is the an­tic­i­pated hike in tax rate to 18-20% from the cur­rent ser­vice tax rate of 15%

in­ter­net-of-things. The scope is im­mense and has rip­ple ef­fect on gross do­mes­tic prod­uct (GDP).

In­dian gov­ern­ment rec­og­nizes the trans­for­ma­tive po­ten­tial of the sec­tor with the devel­op­ment of its ‘Dig­i­tal In­dia’ ini­tia­tive, which looks to em­power one bil­lion peo­ple by pro­vid­ing In­ter­net ac­cess to all and to make broad­band a util­ity for ev­ery cit­i­zen.

Martin Luther King Jr said ‘The time is al­ways right to do the right thing’and the time is in­deed right for the in­tro­duc­tion of a land­mark re­form – The Goods and Ser­vices Tax (GST) regime. It is clearly In­dia’s great­est in­di­rect tax re­forms and will be marked as a mile­stone in In­dia’s eco­nomic his­tory. The 122nd Con­sti­tu­tional Amend­ment Bill passed unan­i­mously by both the Houses of the Par­lia­ment in­tro­duces a com­mon Goods and Ser­vice Tax or GST and marks a new dawn in the tax ad­min­is­tra­tive struc­ture of the econ­omy. Now, it is only a mat­ter of time be­fore the bill is rat­i­fied by the states and is fi­nally put for the Pres­i­dent’s as­sent.

While the step brings in its set of cheers, there are gran­u­lar sec­tor-spe­cific is­sues, which would need fur­ther con­sul­ta­tion. For the telecom in­dus­try specif­i­cally, the Bill has come with a mixed bag of op­por­tu­ni­ties and is­sues. Grap­pling with the chal­lenges of high tax levies, and a huge debt bur­den, the sec­tor is al­ready reel­ing un­der pres­sure. The draft GST how­ever, doesn’t end the sec­tor woes.

Though there is plen­ti­ful to cheer about too. To be­gin with, GST is ex­pected to fa­cil­i­tate ease of do­ing busi­ness, ad­dress am­bi­gu­i­ties in the cur­rent in­di­rect tax regime, and bring in a uni­fied tax ap­proach. GST is likely to in­crease in­put credit base and re­duce tax avoid­ance. One can fore­see that the on­go­ing lit­i­ga­tion of clas­si­fi­ca­tion of an ac­tiv­ity into sup­ply of goods or pro­vi­sion of ser­vices such as sale of SIM Cards, sup­ply of value added ser­vices, etc., would be po­ten­tially put to rest pro­vided the pro­posed rates on goods and ser­vices are same. Fur­ther, all the non-cred­itable state taxes would be­come cred­itable for this sec­tor un­der the GST regime thereby, in­creas­ing the credit pool.

How­ever, as it is said, good things do not come easy and GST also brings few road­blocks or chal­lenges, which draws at­ten­tion for the tele­coms sec­tor. The fore­most con­cern, also pointed by the Chief Eco­nomic Ad­vi­sor, Arvind Subra­ma­nian is the an­tic­i­pated hike in tax rate to 18-20% from the cur­rent ser­vice tax rate of 15%. This will in­crease the over­all bur­den on the fi­nan­cially crunched sec­tor. Op­er­a­tors are likely to pass the bur­den of the surge to the end con­sumers, thus driv­ing up the cost of pro­vi­sion­ing of ser­vices.

The GST regime, as spec­u­lated, will have three slabs – 12% for es­sen­tial goods and ser­vices, 18-22% stan­dard rate for all goods and ser­vices, 40% for prod­ucts that the gov­ern­ment wants to dis­cour­age. Telecom­mu­ni­ca­tion ser­vice can be termed as es­sen­tial ser­vices and should thus be taxed un­der the 12% slab. This clas­si­fi­ca­tion will surely give im­pe­tus to Gov­ern­ment’s Dig­i­tal In­dia ini­tia­tive. It is only then that the Gov­ern­ment would be able to jus­tify its ul­ti­mate aim of con­sumer wel­fare with the in­tro­duc­tion of GST. Keep­ing this vi­sion in mind, the pro­posed GST must en­sure that the rates of taxes are low on ser­vices as well as mo­bile hand­sets in or­der to en­sure af­ford­abil­ity of telecom ser­vices.

The non-uni­for­mity of GST rates across states is likely to have a direct bear­ing on the pric­ing of ser­vices. For in­stance, if the Max­i­mum retail price of a recharge coupon is Rs 100 and the GST rate is 20% and 25%in Delhi and Haryana, re­spec­tively. The talk-time of­fered would be Rs 83.30 and Rs 80 in Delhi and Haryana re­spec­tively. In the ab­sence of a uni­form GST, the par­ity in pric­ing recharge coupons for pre­paid cus­tomers across states, will be a con­cern. Thus, it is im­per­a­tive to have uni­form rate of Central GST, State-GST and In­ter-state GST for telecom ser­vices across States/ Union Ter­ri­to­ries.

What fur­ther adds to the com­plex­i­ties is the fact that tel­cos op­er­ate on the ba­sis of Ser­vice Ar­eas/ Cir­cles, ac­count­ing for state-wise rev­enues would re­quire a mas­sive over­haul of IT and ac­count­ing sys­tem. It would also re­sult in enor­mous in­crease in com­pli­ance ef­fort, mul­ti­ple as­sess­ments and au­dits and cas­cad­ing im­pact of taxes on ac­count of credit block­ages in each state. Also, this would lead to dis­par­ity in telecom reg­u­la­tions and the GST pro­vi­sions as sup­plies from state per­spec­tive would not be rec­og­nized as sup­ply from reg­u­la­tory per­spec­tive in multi-state cir­cles.

At present, from the pro­vi­sions of the model GST law, it is still am­bigu­ous whether sup­plies from one State reg­is­tra­tion to another State reg­is­tra­tion of same le­gal en­tity would be li­able to GST.

In the event such sup­plies are made li­able to GST, it would re­sult in is­sues of val­u­a­tion of such sup­plies. Fur­ther, due to IT sys­tems be­ing aligned with Cir­cles and not States/ UT, telecom op­er­a­tors do not have abil­ity to iden­tify pro­vi­sion of ser­vice from one cir­cle to another. Thus, com­plex­ity would arise in case of such self-sup­plies.

The ‘Place of sup­ply’ rules are com­plex and re­quire mul­ti­ple as­pects to be fac­tored in and clar­i­fied. The place of sup­ply for fixed line and leased cir­cuit would be the place of in­stal­la­tion. How­ever, it would be a chal­lenge to de­ter­mine the place of in­stal­la­tion, given that the lines and cir­cuits of­ten run across states and sub­sea. Also, there is no rea­son­able ba­sis for ap­por­tion­ing ser­vice value to in­di­vid­ual con­nec­tions where lump sum con­sid­er­a­tion is fixed for such ser­vice. In case of pre­paid con­nec­tions, the place of sup­ply would vary on the ba­sis of na­ture of ser­vice (pre-paid or post-paid) and mode of pay­ment (on-line or off-line). In case of pay­ments made by cus­tomers through any mode other than the in­ter­net, the place of sup­ply would not be de­fin­i­tive. Also, real-time up­dat­ing of the billing ad­dresses of ser­vice re­cip­i­ent’s in records of ser­vice provider would be cru­cial to de­ter­mine the place of sup­ply.

Un­der the cur­rent tax regime, the dis­trib­u­tors or sell­ing agents of SIM or recharge vouch­ers are ex­empt from Ser­vice tax. As the model GST law cur­rently reads, in the ab­sence of an MRP based val­u­a­tion for the telecom op­er­a­tors and spe­cific ex­emp­tion to the dis­trib­u­tors, it ap­pears that each leg of the sale of SIMs/ RCVs would be sub­ject to GST. Thus, the en­tire sup­ply chain in­clud­ing th­ese deal­ers big or small would be li­able to get reg­is­tered and discharge tax.

Cur­rently, the telecom op­er­a­tors are in lit­i­ga­tion with the Ser­vice tax au­thor­i­ties re­gard­ing el­i­gi­bil­ity to claim Cen­vat credit of ma­te­ri­als used in con­struc­tion of tow­ers, shel­ters etc. Al­though the GST draft ap­pears to have ex­panded the am­bit of credit avail­able, the ad­mis­si­bil­ity of in­put cred­its on pas­sive telecom in­fra­struc­ture still re­mains am­bigu­ous, as there is a spe­cific re­stric­tion on in­put credit of goods and ser­vices used for con­struc­tion of im­mov­able prop­erty. Thus, clar­ity would be re­quired in this as­pect that pas­sive in­fra­struc­ture should be treated as mov­able prop­erty and thus, in­put credit shall be al­lowed.

Trans­fer of cred­its us­ing in­put ser­vice dis­trib­u­tor mech­a­nism is a pos­i­tive step for en­sur­ing seam­less trans­fer of cred­its, both within and across State bound­aries. How­ever, the scheme should also pro­vide sim­i­lar mech­a­nism to trans­fer cred­its per­tain­ing to in­puts and cap­i­tal goods used by the in­dus­try and pro­cure­ment/ lo­ca­tion of as­sets used to pro­vide telecom ser­vice need not be ge­o­graph­i­cally aligned with pro­vi­sion of telecom ser­vice.

Telecom sec­tor is the sec­ond largest con­sumer of diesel, af­ter rail­ways. Tower com­pa­nies will not be able to set off their in­put duty li­a­bil­i­ties if petroleum prod­ucts con­tinue to re­main out­side GST Frame­work.

It might be too early to say whether GST brings a win-win sit­u­a­tion for the Telecom sec­tor in In­dia, but what can’t be ig­nored is the need for an ef­fec­tive im­ple­men­ta­tion to reap the ben­e­fits of this his­toric tax re­form. An ef­fec­tive ad­min­is­tra­tion will be a ma­jor de­cid­ing fac­tor as to whether GST is re­ally able to achieve what it prom­ises to. To con­clude, the in­dus­try’s out­look to­wards in­tro­duc­tion of GST is fairly pos­i­tive and wel­com­ing and hopes for a smooth tran­si­tion to the new sys­tem.

Telecom sec­tor is the sec­ond largest con­sumer of diesel, af­ter rail­ways. Tower com­pa­nies will not be able to set off their in­put duty li­a­bil­i­ties if petroleum prod­ucts con­tinue to re­main out­side GST Frame­work.

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