Telecoms are worried about service tax on spectrum

telecom tower in India rural area
Telecom industry body COAI, which is worried about service tax on spectrum, says Finance Bill 2016 proposal can potentially hurt the Digital India campaign of the Government.

COAI in a statement on Sunday said that service tax should not be applicable on assignment of right to use spectrum by the India Government.

The telecom industry association for GSM operators also said the expected tax burden on the telecom industry in the proposed scheduled spectrum auction in June-July 2016 will be Rs 77,000 crore.

Levy on past spectrum assignments of spectrum is a case of retrospective taxation, says COAI.

Deferral of input credit pertaining to Service tax paid on right to use spectrum over nearly 20 years results in cascading of taxes and against the spirit of Goods and Services Tax.

COAI warns that telecom services are likely to become costlier. COAI represents telecom network operators such as Bharti Airtel, Idea Cellular, Vodafone, etc.

The Government vide the Finance Bill 2016 has proposed a tax framework that will be punitive and unfair to the telecom sector.

Key proposals:

Assignment of spectrum and subsequent transfer thereof is proposed to be declared as a services under Section 66E of the Finance Act, 1994.

All Government services have been made liable to service tax and to be paid by the recipient on a reverse charge basis with effect from 1 April 2016.

Cenvat Credit of the tax so imposed on such assignment is proposed to be deferred over the life of the license period.

The Government has stated that the assignment of right to use spectrum by the Government and its subsequent transfer is a service under Section 66E and is leviable to Service tax and. Assignment of spectrum, a scarce natural resource, is an important sovereign function of the Government, and treating such activity as ‘service’ liable to service tax at par with normal commercial transactions is a deviation from the standard practices adopted across the world by other jurisdictions.

Section 66B of the Finance Act, 1994 provides for a levy of Service tax not only services provided but also services agreed to be provided. In view of this provision there can’t be any Service tax on spectrum that stood assigned or agreed to be transferred on or before 31 March 2016. Assignments or transfers executed prior to the enactment should not be liable to Service tax.

The India government has never sought to align credit availability to the life of an asset or the period of benefit accrued precisely for the reason that any such deferral means effective denial of credits as the net present value of deferred credit availment diminishes significantly when credit is deferred for such large period.

Credits of service tax imposed in respect of received services are available immediately on receipt of invoice or payments for services. Even in case of capital goods, benefit of credit is available within an average period of six months (over two financial years).

The proposed deferral of credits over the license period will mean that credits availment will be stretched over 20 years.  The deferral effectively results loss in the range of 61 to 71 percent of the Service tax payable on the assignments by the government.

The proposal will undo the Government tax reform program of ensuring mitigation of cascading effect of taxes on account of credit blockages.

It needs to be appreciated that the service tax levy on spectrum assignment means that during auctions lined up for June-July, where reserve price is around Rs 5.36 lakh crore, the industry will have to cough up minimum Rs 77,000 crore as service tax. Further deferral of credits will mean that the industry will be burdened by minimum effective cost of Rs 40,000 – 50,000 crore. Government’s tax estimates from Service Tax for 16-17 do not anticipate revenue collection to this extent.

Vina Krishnan
[email protected]