GSM mobile operator association COAI has demanded changes in the draft GST law to address the concerns of the Indian telecom industry.
COAI represents GSM operators such as Bharti Airtel, Idea Cellular, Vodafone, Reliance Jio, among others.
The tax rate will be ranging from 5 percent to 28 percent as per the Goods and Services Tax norms in India.
The telecom industry is unique and is regulated on the basis of 22 mobile telecom circles out of which 12 circles are having geography spread across more than one State. Similarly, national long distance and international long distances are national licences.
“The regulations require to value certain specific activities for the purpose of licence fee calculation when undertaken across circles such as interconnect User Charges, roaming charges, termination charges, etc.,” said Rajan S Mathews, director general of COAI.
Telecom operators supply pre-paid telecom offerings through printed pre-paid vouchers as well as electronic top ups. About 30 lakh distributors and retailers resell the same for small margins. On estimated basis at 18 percent the tax revenue shall not exceed Rs 2,000 crore on annualized basis across the country.
COAI says that levy of GST on MRP, payable by telecom operators is logical step as it ensures full tax revenue for the Central as well as State governments and removes the burden of compliance and its administration on lakhs of small distributors and retailers.
Key concerns of the industry under GST regime
No geographical boundaries to be imposed for tax compliance purposes since telecom services are supplied seamlessly across country
Facts and issues: Telecom service operates in a unique manner and therefore is given distinct treatment in most GST jurisdiction. The framework prescribed needs to be sensitive to the nuances to this operation.
Impact on industry if issue not addressed: In absence of such a nuanced treatment the telecom industry will face massive amount of cascading taxes as also ambiguity in relation to meeting basis aspects of compliances such as payment of tax. There is no doubt that the health of industry will be materially harmed and an implementation insensitive to the special needs of the sector would be crippling to the industry.
Impact on consumers if issue not addressed: Cascading of taxes will lead to increased costs to telecom operators which would translate into increase in prices of service offerings by telecom operators leading consumers into disadvantageous position.
Solutions: Telecom service is performed nationally and therefore credit should be seamlessly granted. Clarity needs to be provided to ensure and enable the Telecom companies are able to undertake adequate compliances.
It is imperative that these nuances of the telecom industry are taken into account and the mechanisms such as a framework allowing telecom operators to pay tax under an IGST consolidated registration are considered.
Treatment for provision of service to self (i.e. self-supplies)
Facts and issues: Currently, under the extant DoT regulations, there are 22 telecom circles covering 29 States and 7 Union Territories. Twelve telecom circles cover geography of more than one State (for e.g. Delhi NCR Circle covers Delhi, Gurgaon and Noida encompassing 3 States). In addition, National Long Distance (NLD) license is a national license and covers the length and breadth of the entire country.
Due to IT systems being aligned with Circles and not States/ UT, in a multi-State Telecom Circle, the telecom operators do not have the ability to identify various services such as roaming, inter-connect, termination, etc. performed in one State and provided to a subscriber in another State of the same multi-State Circle. Additionally, it is also not possible to identify transactions State-wise when such transactions take place between Circles involving such multi-States.
Additionally, for carriage services of carrying call from one circle to other circles provided by NLD operator, it is not possible to split the revenue it earns for every call between the call originating State, interregnum states from where calls are carried through Optical Fibre Cables and the termination State.
Impact on industry if issue not addressed: In GST, it is envisaged that taxes would have to be paid on self-supplies. As such self-supplies are revenue neutral since the equivalent amount of credit is also passed on to the telecom operator in the other State, thus it doesn’t help in revenue generation to Centre or State, but only puts complex compliance burden on industry.
Impact on consumers if issue not addressed: Increased complexity and adverse impact of cash-flow of telecom operators resulting from taxation of self-supplies could lead to increased costs to telecom operators which may trigger increase in price of service offerings resulting in increased burden on consumers.
Solutions: Given the above complexities, it is recommended that self-supply between two registrations of same legal entity should not be treated as supply or be treated as zero-rated supply and transfer of credit should be allowed without imposing mandatory taxes.
Payment of Tax on MRP for pre-paid
Facts and issues: The Model GST Law has adopted transaction value approach even in case of supply of vouchers or e-top-up by small dealers, which is a material departure from current service tax regime wherein payment of service tax is made on MRP of voucher or e-top-up by the telecom operators and the subsequently, distribution chain is exempt from service tax.
Impact on industry if issue not addressed: Pre-paid segment revenue is about Rs.1.25 lakh crores involving about 30 lakh distributors/retailers engaged in distribution of pre-paid vouchers/ Sim Kit Unit (SKU)’s with potential margin of about 4 percent. The expected annual SGST plus CGST (@18 percent) revenue for 36 States/UT and Centre on margins of distributors/retailers would be approximately Rs 900 crore. Under proposed machinery in GST, the Government will end up creating significant administrative machinery for governing the compliance of such vast distribution chain. Even then, there is a probability that the retailers may end up outside the threshold (revenue of Rs 20 lakhs p.a. currently prescribed) and thus there could be a loss of revenue to the Government.
Impact on consumers if issue not addressed: In case of tax-inclusive pricing, if rate of tax across States varies, consumers could get different talk-time in different States for the same amount of recharge, which could create confusion in minds of consumers leading to increase in customer complaints and consumer dissatisfaction.
Solutions: Thus, MRP based valuation, whereby the telecom service provider pays tax on primary invoicing point and distribution chain is exempt, should be continued under GST regime.
Concerns around determination of tax liability under GST
Facts and issues: The Model GST Law has recognized uniqueness of telecom sector by specifying special rules for telecom offerings. Place of supply (‘PoS’) as per Model GST Law is largely workable subject to clarity on following aspects to avoid ambiguity and litigation. For example, in case of Leased circuit/ internet leased circuit/ fixed line, PoS based on installation of leased circuit/ telecommunication line is not workable where installation is in multiple States / UT and a lump sum consideration is charged.
Location of service provider is essential for determining the place from where payment of tax is required to be made. In case of multi-State circles, issue would arise as to determination of location of service provider as it is not possible to identify the particular State from which services are supplied.
Solutions: To avoid any ambiguity, it is recommended to align PoS for all telecom services (except pre-paid services) with general rule for B2B and B2C supplies. Thus, in case of supplies to registered person (i.e. B2B supplies), PoS should be contractual billing address of recipient and in case of supplies to unregistered person (i.e. B2C supplies), PoS shall be address of recipient on records of service provider or location of service provider where address of recipient is not available.
In case of pre-paid services, PoS for physical vouchers and e-top up (other than internet recharges) should be (a) address of distributor; or (b) place from where voucher is sold directly to customer. PoS for internet recharge as per model GST law is workable subject to clarity on who is recipient in case talk-time is sold through third party service provider such as Paytm.
The present drafting of provisions pertaining to location of service provider lead to certain amount of ambiguity for telecommunication services which could result into increased tax uncertainty and unwarranted disputes. It is urged that the said issues are addressed by the Government in drafting GST law.
Lower Rate for Telecom services
Facts and issues: Telecom service is an infrastructure service designated as an essential service under the Essential Services Maintenance Act, 1968 and is availed by masses. At present, service tax at the rate of 15 percent is payable on telecom services. Under the GST regime, tax on services has been proposed at 18 percent.
Impact on industry if issue not addressed: Such increase in the rate of tax under GST regime would have a direct impact on increase in costs for the subscribers and would be crippling for the telecom industry as well.
An increase in rate would have an adverse impact on the Digital India initiative as well as the financial inclusion plan of the Government. Mobile telecom service is the backbone for these initiatives and increased tax burden would cause undue hardship to the operators.
Impact on consumers if issue not addressed: Telecommunication services are used by masses and higher rate of tax on telecommunication services would result in increased burden on consumers.
Solutions: Considering burden on the common man and inflationary effect due to increase in rate of tax, it is essential that the GST rate for telecom service should be pegged along with rates for essential goods or services.
Other issues relating to admissibility of input tax credits
Facts and issues:
Removal of restrictions on admissibility of credit: Removal of cascading impact of taxes and rationalisation of credit is at the very heart of the GST framework. The industry, therefore, expects a much more liberal credit mechanism that allows credit of all goods and services used in relation to telecom business as compared to the relatively restrictive credit mechanism being considered under the model GST law.
Though the model GST law contains provisions allowing certain transitional credits, the draft law has restricted the credits to merely eligible credits under both present and GST regime. For all service providers, this would also mean that costs such as VAT, entry tax incurred on capital goods and inputs lying in stock immediately prior to implementation of GST would not be available as credit even though such goods continue to be used under GST regime. Not only is this provision detrimental to the interests of service providers but could have larger ramifications on even economic activity nearing the date of implementation of GST.
Non-levy of GST on petroleum products: Telecom sector is the second largest consumer of diesel, after railways. Continuation of Central Excise duties and State Sales taxes on petroleum products will result in massive cascading impact on the economy as also the telecom sector.
Exclusion of real property and electricity duty from GST framework: If real property and electricity duty not subsumed, it would result in increase in overall tax cost and be an additional burden for the industry.
Impact on industry if issue not addressed: In case credit restrictions continue to apply and transitional provisions are comprehensive, the same would have an adverse impact on the industry since the cost of doing business due to credit blockage/ cascading is likely to increase.
Impact on consumers if issue not addressed: Credit blockages in case of telecom operators would result in increased costs and working capital blockages, leading to increase in costs. Increase in costs could trigger price increase by telecom operators affecting close to a billion consumers of telecommunication services.
