After witnessing exponential growth over a decade, the Indian telecom industry is experiencing a change of tide. Problems such as rapidly changing market conditions and dynamics, falling fixed subscriber numbers, limited growth in mobile subscriber base are exerting pressure on the existing players.
As the countdown to the Union Budget 2013 begins, the Indian telecom sector is hopeful that some incentives will be offered to boost the sentiment of telecom players and bring clarity on issues, which continue to create uncertainties on taxation of income.
Withholding tax rates on margins of pre-paid distributors: Tax authorities often treat distributors as agents of telecom operators, thereby alleging that the difference between the maximum retail price and the price at which prepaid vouchers are made available to the distributors is commission and accordingly, tax at 10 per cent should be withheld on the margin. Given the long litigation on the issue, it is high time the issue was addressed by rationalising the withholding tax rate/ provisions and issuing the necessary clarifications.
Withdrawal of retrospective expansion of definition of 'process': The retrospectively amended definition of the term 'process' is now deemed to include transmission by satellite, cable, optic fibre, etc.. This may result in the inclusion of payments to other service providers for IPLC, satellite usage charges, interconnect, roaming, etc., resulting in significant litigation for the telecom operators in India. The withdrawal of the expanded definition of 'process' or applying the same prospectively, for at least withholding tax provisions, would come as a major relief to the sector.
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. The absence of a specific provision providing clarity on tax treatment of these costs continues to result in uncertainty and may lead to unwarranted litigation. Similarly, an auction based one-time spectrum charges would also be payable by most telecom operators and deductibility of the same could also result in tax litigation. A specific amendment/clarification is necessary to address the tax treatment of the upfront 3G spectrum fee and one-time spectrum fee.
Availability of input credit on telecom towers, shelters and other goods installed at tower site: On the indirect tax front, one of the areas requiring urgent rationalisation is the availability of input tax credit of duties paid on telecom infrastructure (which is the backbone of the entire network). The sector is making significant investments and, therefore, it is imperative that the sector is able to recover its input costs against taxes payable on output supplies.
Taxability of value added services (VAS) - services as well as goods: The ambiguity on the taxability of VAS which includes online gaming, caller tunes, ringtones, etc., continues because of the overlapping scope of both service tax and VAT legislation. This has resulted in significant litigation. A resolution to this matter should be provided by specifying that VAS attract only service tax or VAT/ CST.
(Rohit Verma, senior tax professional, Ernst & Young. The views expressed here are personal.)