The following article is an Clear cut explanation of Impact of GST on the Telecom Sector. Goods and Services Tax (GST) is an indirect tax reform which aims to remove tax barriers between states and create a single market. For that to happen the constitution first needs to be amended to remove different layers of governments’ exclusive powers to levy taxes. It is widely expected that the advent of GST is likely to lead to a sudden spike in charges for the ultimate consumers of telecom services that currently attract a tax rate of 15%. One of the biggest impact areas of GST is the compliance requirements that the tax reform brings with it. In our previous article, we have explained the concept of Capital Goods under GST and also Refund process.
The model draft GST law has conceptualised the broad framework. Introduction to GST seems a welcome move for the industry on a whole, due to ease of registration, seamless credit flows, and a unified tax approach.
Having said so, there are a large number of sector specific issues that require active engagement and dialogue between the industry and the Government.
Impact of GST on the Telecom Sector
The Telecom sector, with its mammoth outreach to more than a billion subscribers cutting across State boundaries, is one of the India’s core economic drivers. Saddled with high debt pile and need for greater investment, the sector currently faces several issues on the indirect taxation front as well. In view of this, the sector had huge hopes from the proposed tax reform. However, the draft model GST law doesn’t seem to bring an end to the sector’s woes – at least for now!
Impact of GST on the Telecom Sector – place of supply
With the advent of GST the States get the power to levy tax on services as well, thus necessitating a decentralized registration and compliance requirement which calls for a proper definition of ‘place of supply’ to avoid any jurisdictional controversies.
Although, the draft place of supply provisions contain a separate clause dealing with telecom services, the unwarranted distinction created on basis of nature of service (pre-paid or post-paid) and mode of payment (e-payment or through physical recharge vouchers) is bound to create unnecessary distortions and disparities.
With service recipient’s address being made basis for determining place of supply, the TelCos are burdened with onerous responsibility of keeping their database updated on real-time basis. What further adds to the complexities is the fact that TelCos operate on the basis of Service Areas/Circles (that doesn’t necessarily align with the geographical boundaries of States/UTs) and hence accounting for State-wise revenues would require a massive overhaul of IT and accounting system.
Impact of GST on the Telecom Sector – Intra-circle termination and Intra-circle roaming services
Another aspect that gains paramount importance is the intra-circle termination and intra-circle roaming services for same operator especially in case of Multi-State Circles. TelCos, presently, do not even have any mechanism to track intra-Circle termination and roaming supplies.
Further, the valuation aspects need to be specifically addressed in case of such self-supplies, which seem to come into the tax net in the proposed GST regime. Also, it becomes imperative that instead of Multi-State registrations, the TelCos are allowed a single PAN-India registration.
While the debate regarding the finalisation of GST rate (18% being suggested by the report of Chief Economic Advisor) continues to be a talking point. It is widely expected that the advent of GST is likely to lead to a sudden spike in charges for the ultimate consumers of telecom services that currently attract a tax rate of 15%.
In absence of uniformity of GST rates across States, issues with regard to pricing of recharge coupons for pre-paid customers are likely to crop-up. Unfortunately, the problem of inadmissibility of credits relating to expenditure on passive infrastructure doesn’t seem to have been clearly addressed in the draft model GST law and there still remains ample room for credit blockages in the proposed regime. This not only vitiates the seamless flow of credit, one of the hallmark principles of GST regime, but also triggers a fresh round of litigation for the sector.
Impact of GST on the Telecom Sector – composite supply
In relation to telecom equipment and service provider, the concept of ‘composite supply’ needs to be addressed. The draft model GST law seems to be silent, except for defining the term.
Impact of GST on the Telecom Sector – Tax reform
One of the biggest impact areas of GST is the compliance requirements that the tax reform brings with it. As against a single registration and merely two-three returns, the proposed legislation would require TelCos to file manifold returns per year, apart from separate assessments and audits in each of the States.
The concept of credit matching being ushered in with GST, is likely to add to transparency, but would be a hard nut to crack. Besides, the new regime may open a Pandora’s Box relating to taxability of SIM cards, recharge coupons etc.
Ever increasing penetration of internet services and growing user base, makes it a necessary that burden of high costs which the telecom sector currently faces is minimized.
April 1, 2017 being targeted as the roll out date, the Government should adopt a participative approach to ensure that the concerns of the sector are adequately addressed, which would be a harbinger to a stable and tax friendly regime.