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Last Updated : Feb 29, 2016 08:25 PM IST | Source: Moneycontrol.com

Budget 2016: Mixed bag for telecom industry: EY

On one hand the industry would take a sigh of relief as this would render such transactions outside the purview of VAT however, on the other hand levy of Service tax would result in significant blockage of funds in credits.


Bipin Sapra

The telecommunication industry has always been one of the key industry sectors for every Finance Minister in India. The Union Budget 2016 introduced today by Mr. Arun Jaitely only reaffirms the importance accorded by the Government to this sector. The telecom industry had many expectations from this budget including solutions to some of its key concern areas, ranging from rationalization and broad-basing of Cenvat credit scheme, clarification on availability of Cenvat credit on passive telecom infrastructure, availability of credit on Swachh Bharat Cess, accumulation of Education Cess credits, etc. to name a few.

While the FM has tried to resolve some of the issues currently plaguing the telecom industry, largely the expectations of the industry from the budget have remained unfulfilled. One of the welcome proposals include clarity over taxability of assignment of right to use spectrum which has now been specifically declared to be a service. On one hand the industry would take a sigh of relief as this would render such transactions outside the purview of VAT however, on the other hand levy of Service tax would result in significant blockage of funds in credits.

On the income tax part, it has been clarified that the deduction shall be available over the period of life of spectrum, however, the same will result in huge litigation for spectrum fees paid by telecom operators prior to March 31, 2016 specially where the telecom operator have claimed depreciation under Section 32 on such payments.

Also, Customs and Excise Duty [and thus CVD] have been exempted on parts/ components/ accessories for use in manufacture of Routers, broadband Modems, Set-top boxes, digital video recorders (DVR) / network video recorder (NVR) etc. This would help the industry in reduction of input costs which would consequently reflect in the services provided to end users/ subscribers.

In line with Government’s thrust on ‘Make in India’ campaign, this budget has seen withdrawal of exemption/ levy of under Customs duty on various telecom equipment. Equipment such as raw material used in manufacture of fibre optic cables, soft switches, VoIP equipment, media gateways, media gateway controllers, etc. have been excluded from the ambit of exemption under Customs.

Similarly, the exemption from Customs duty on chargers/adapters, battery and wired headsets/speakers for use in manufacture of mobile handsets has also been dispensed with.

Some other changes which would impact the telecom industry include introduction of Krishi Kalyan Cess @0.5% on taxable services, filing of annual return by service providers, extension of default limitation period for issuance of show cause notices from eighteen months to thirty months.

On the direct tax front, the other key demands of the Telecom Industry, which are important for growth engines for the economy, have been ignored. Specifically, the issue with respect to discounts offered to telecom distributors, exclusion of standard telecom services from ‘Royalty’, definition of the term “Royalty” in the Income-tax Act, shall continue to exist as there is no clarification brought in the Union Budget on this.

Also, proposal have been made to reduce compliance burden on foreign nationals to not obtain PAN for lower withholding tax rates; constitution of committee to oversee the cases with respect to retrospective amendments and provide stable tax regime, introduction of Dispute Resolution Scheme, deferment of applicability of POEM based residence test, which are positive moves by the Finance Ministry.

Author is Tax Partner, telecom practice, EY

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First Published on Feb 29, 2016 08:25 pm
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