GSM telecom operators association COAI today welcomed the passing of the GST Bill as this is a significant step towards simplified goods and service taxation.
“The industry welcomes and celebrates this iconic reform, while urging the government to ensure that the rate applied for the telecom services should be no more than the existing 15 percent to meet the government’s vision of a connected digital India and ensuring affordable services,” said Rajan S Mathews, director general of COAI.
GST and key issues
Lower rate of tax and Uniform rate of tax for telecom services
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. Any further 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. Telecom services should therefore, be taxed at merit rate of tax applicable in case of essential goods and services and not at rates being higher than present rate of 15 percent. Separately, given that States have the flexibility to determine the rate of tax in their respective State within a band, the rate of tax across States for telecom services could vary. If the GST rates vary across States for telecom services, due to non-alignment of Circle boundaries with geographical State/ UT boundaries, such difference in tax rates could result in non-compliance with certain regulatory guidelines, rise in consumer complaints due to impact of tax rate on pricing. The aforesaid challenges in case of differential rates of tax across States has the potential to even disrupt business itself. Therefore, it is imperative to have uniform rate of tax for telecom services across States/ UTs.
Single pan-India registration
Model GST law envisages every service provider to obtain registration in each State/ UT from which it provides services. Telecom services are highly regulated and provided in a seamless manner across States/ UT to over a billion customers including B2B and B2C. Given the unique characteristics of the telecom sector, State-wise registrations may not be feasible for telecom sector to comply with. For pan-India service providers, state-wise registrations would result in humongous increase in compliance effort, tax uncertainty due to multiple assessments and audits and cascading impact of taxes on account of credit blockages in each state without yielding any incremental revenue for the government. It is, therefore, imperative that telecom operators should be allowed to obtain single pan-India registration and seamless transfer of credits across States be allowed.
Concerns around determination of tax liability under GST
The place of supply rules and location of service provider are integral for determining the tax liability. The policy makers have crafted a specific place of supply rule for telecom services, which is step in the right direction and is well appreciated by the industry players. However, the present drafting of provisions pertaining to location of service provider and the place of supply rules for telecommunication services lead to certain amount of ambiguity leading into increased tax uncertainty and disputes. While the provisions are workable subject to certain clarity required in some cases, in some specific cases they are infeasible to comply with. Incrementally, the draft model GST law has prescribed the place of supply in respect of only certain telecom services and has not prescribed the same place of supply in respect of various other telecom services. Given that location of service provider and place of supply form an important aspect for determining tax liability, it is extremely critical for policy makers to address the same and make necessary changes in draft GST provisions.
The valuation prescribed under the model GST law is based on transaction value with certain artificial inclusions and deductions. Further, in case of supplies between ‘related persons’, in certain cases, the value of supply is proposed to be determined as per GST Valuation Rules. GST is a value added tax, an indirect tax with tax being paid at each leg on value addition and therefore, having such inclusions and exclusions from transaction value is not required. Even the concept of related party transactions should be done away with since GST does not mandate such provisions (similar to present service tax provisions where there exist no valuation provisions for related party transactions). Instead, the transaction value (i.e. price actually paid or payable) should be adopted in all cases.
Self-supply of services based on State-wise registrations should not be liable to GST: At present, from the provisions of the model GST law, it is not clear 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. Given that areas covered under telecom Circle are not aligned with geographical State/ UT boundaries, there are 12 Circles which cover more than one State/ UT. Due to this, in case of such Multi-State Circles, there are certain supplies across States which are not recognized as supply from regulatory standpoint.
Further, due to IT systems being aligned with Circles and not States/ UT, telecom operators do not have ability to identify provision of service across States in multi-State Circles. Further, there are 5 States/ UT which cover areas covered by more than one telecom Circle. For instance, certain areas of the State of Uttar Pradesh are part of Delhi-NCR Circle, UP (West) Circle and UP (East) Circle. Even in such cases, complexity would arise in case of self-supplies as one Circle can provide services to another Circle even though they cover the same State. Given the above, in our view, supply to self-based on State-wise registrations should not be liable to GST.
Admissibility of input tax credits
(a) 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.
(b) Input Service Distributor mechanism
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 given that and procurement/ location of assets used to provide telecom service need not be geographically aligned with provision of telecom service.
(c) Transitional credit
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.
(d) Cascading impact of taxes due to certain exclusions from GST framework
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.
COAI said the telecom industry is hopeful that the policy makers will give consideration to their concerns and make plausible amendments in the draft model GST law.