Home India Major reforms in pain areas needed to bring stability in telecom sector:...

Major reforms in pain areas needed to bring stability in telecom sector: EY

The Indian telecom sector has witnessed a fall in profitability in recent times primarily due to raging price wars between the industry players

3
0
SHARE

By Vishal Malhotra, Tax Leader, Technology, Media & Entertainment and Telecommunications (TMT), EY India

The Indian telecom sector has witnessed a fall in profitability in recent times primarily due to raging price wars between the industry players which has otherwise benefitted the consumer base at large. Catering to more than 1.2 billion subscribers, the industry has witnessed consolidation and multiple acquisitions in recent times. The industry believes that by the end of 2018, the collective synergies should reap positive results.

Operating in a highly competitive and regulated environment, the Indian telcos have time and again sought support from the government for streamlining of tax and regulatory laws which have added to their financial woes. Although, representations have been made to the Finance Ministry to cut down tax compliances and bring certainty in litigious issues, however the efforts have been largely futile as the bucket list of the industry players broadly remains unchanged.

Withholding tax on discounts offered to distributors

One of issues which has haunted telecom sector for long is the obligation to withhold tax on discounts offered to distributors of pre-paid services. The income tax authorities have taken a view that such discounts are in the nature of ‘commission’ since the relationship between the telcos and the distributors is in the nature of principal to agent (P2A), and therefore, withholding of tax at source under section 194H of the Act is mandated. On the other hand, the telcos are of the opinion that withholding provisions are not attracted since the distributors’ margins are not in the nature of ‘commission’ and the relationship with the distributors is that of a principal to principal (P2P).

Although, lately the High Courts across the country, have primarily ruled in favour of the income tax authorities, the final verdict from the Supreme Court is still pending. The difference in the positions adopted has resulted in piling up of litigation year on year and an increased tax bills. Till this issue attains finality, the industry will keep grappling with high tax demands raised on a repetitive basis and ever increasing interest cost. Though nothing much is expected on the principle issue involved, it would be a welcome change if the Budget addresses the cash flow trouble of the telcos by reducing the withholding tax rate on commission from the current 5% to say 1%. This will not only reduce the burden of demands to a significant extent but will also ensure effective cash management for the distributors of prepaid services who operate on very low margins.

Deductibility of expenditure on acquiring ‘Right to use spectrum’ prior to April 1, 2016

With the introduction of Section 35ABA, there is now clarity on amortization of expenditure incurred for acquisition of ‘right to use spectrum’ over the tenure of the right. However, for the period prior to April 01, 2016 there are ambiguities as to whether the consideration shall be amortizable under the said provision or eligible for tax depreciation under section 32.

The telcos expect a clarification from the Government and provide certainty that the expenditure incurred towards ‘right to use spectrum’ acquired prior to April 1, 2016 would be entitled to depreciation under the normal provisions of the IT Act.

Clarity on characterisation of standard telecom services as ‘Royalty’

The Budget of 2012 unveiled many retroactive amendments, including the infamous amendment to Section 9 which brought within the tax net transfer of shares or interest in a foreign company having underlying assets in India. In the same budget, retroactive amendment was brought in the definition of ‘royalty’ which has intentionally or unintentionally brought within the tax net certain standard telecom services (such as mobile / fixed telephonic, internet charges, roaming charges, interconnect charges etc.). The interpretation of these amendments have been tested before the Courts and the decisions have largely favoured the tax payers. Even internationally, payments for such standard services are not characterised as ‘royalty’, however, the income tax authorities have taken a different view leading to litigations at multiple levels and significant tax demands. Thus, clarification is required with respect to the said amendments to exclude the payments for such standard telecom services from the ambit of ‘royalties’.

Rationalisation of duties and exemptions

The Government, in the past, has withdrawn customs duty exemptions on telecom equipment to promote domestic manufacturing. Disparity on duty structure between imported & indigenous has been supported by the local manufacturers, especially the mobile handset industry which has seen lot of manufacturing being set-up in the past three years. It is expected that the Government, keeping in mind the ‘Make in India’ agenda and demand of domestic manufacturers, would further increase duty on the mobile handsets. The Government may also withdraw duty exemptions on major component (PCBs, Camera module, Connectors) under the phased manufacturing plan (PMP) introduced for mobile handset industry. With such high duty differential, the Government would need to have strict enforcement measures so that the grey market do not thrive.
Domestic equipment manufacturers are also proposing further increase in duty rates on telecom infrastructure products to promote ‘Make in India’. However, the Government should also weigh the cons of increasing duty rates on telecom infrastructure equipment on the cost of providing services. The industry is expecting that the Government shall proceed slowly on rate increase until the comprehensive manufacturing ecosystem is available for achieving the desired intent.

ALSO READ: ​ Telecom sector leads M&A activity in India with six deals

Need for reforms in few pain areas

• The wide powers given to the field officer to order ‘special audit’ has been used as a tool to refer cases of some of the major telcos on the ground that their accounts / transactions are voluminous. The said provisions require a revisit to ensure that special audits are not referred as a norm and a clarification is required to provide that such action must be initiated in very rare circumstances.

• Necessary directions to the field officer for issuing nil / lower withholding certificates in a time bound manner which will be effective from the first day of the financial year will ease the hindrances caused due to delay in issuance of the certificates. Further, issuance of a blanket certificate for all customers instead of customer wise certificates will be also be a welcome change.

As the Indian Telecom Industry is undergoing a massive transition, all eyes are on the upcoming Union Budget 2018, which is set to be unveiled by the Finance Minister, Mr. Arun Jaitley, on February 01, 2018. The telcos are hoping that the important issues will be addressed and streamlined such that the industry is able to focus on their core business activities.

LEAVE A REPLY

Please enter your comment!
Please enter your name here