Nurture and protect the goose that lays the golden eggsWith urban cell phone penetration nearing 100% and rural cell phone penetration around 25%, government’s plans for enabling rural inclusion can set big boost through telecom in disseminating banking, healthcare, education, specialized offerings for fishermen, artisans, etc. through e-connectivity. The telecom sector is expected to be 15% of India’s GDP in few years. Therefore, it needs focus, attention and support of government through various financial measures. This industry is suffering from massive litigation on tax related issues which diverts business focus and attention. Few of them are listed below:
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Under Direct Tax:
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• Payment for 3G/ BWA spectrum: In order to reduce uncertainty and litigation, clarification on whether the payments made for 3G / BWA spectrum be allowable as revenue expenditure or whether they could be amortized as license fees or whether the same would be treated as intangible assets eligible for tax depreciation, would be welcome. The deductibility in respect of interest paid on borrowings towards such 3G / BWA spectrum should also be in line with the deductibility of the payment for such 3G / BWA spectrum
• Rationalization of minimum alternative tax rate: The gap between the normal tax rate (30%) and the MAT rate (currently 18%, proposed 20% under DTC regime) is narrowing year-on-year. The MAT rate needs to be reduced and rationalized in order to be in tune with the spirit of being an alternative tax on book profits.
• Clarity on withholding tax issues: A substantial litigation exists in respect of various withholding tax issues adversely affecting the industry at large e.g. withholding tax from payments like interconnectivity charges, roaming charges, bandwidth charges, commission to channel partners etc. Contradictory rulings of Courts / Tribunals increase the uncertainty over these issues. A legislative clarity is a need of the hour and would be welcome by the industry.
Under Indirect Tax:
• Service Tax:
o Clarity on whether recharge coupons are liable to service tax or sales tax.
o With falling ARPUs, service tax should be accordingly reduced as well.
o Service tax exemption on IUC/ ICR for service providers will help to improve the working capital.
o Cell sites/ tower locations could be made as qualifying capital goods to allow input service credit (CENVAT).
o In order to encourage development of new applications, R&D and contribution to universities & Centers of Excellence towards these initiatives, telecom companies may be given special service tax exemptions.
o Telecom operators give commission to distributor on their margins. Presently, the provisions provide charging, collection and payment of service tax for individual registrations, thereby creating complexity for small distributors. Changes in Finance Act, 1994 should be made to allow telecom industry to discharge service tax liability on distribution margins.
• Customs: Revival of benefits for Telecom service providers on foreign exchange earned by them under ‘Served from India Scheme’ SFIS of the Foreign Trade Policy.
• Excise duty: To encourage rural inclusion drive of government, excise duty and other tax exemptions may be granted to telecom manufacturers for supply in rural areas.
• Funding: Funding from Indian Infrastructure Finance Company Ltd.(IIFCL)be equally extended to Infrastructure based public and private telecom projects.
State Level Entry Tax to be removed on IT equipment and SIM cards brought into the state.
Revenue share: Define clearly items allowed and not allowed for computing Adjusted Gross Revenue for payment of license fees so that all such litigations stop.