GST for telecom needs further tuning
Dated 6th September, 2016
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 smartphone 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 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 GST. 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.
(This article is published in Voicendata.com on 5 September, 2016)