The Cellular Operators Association of India (COAI) has submitted its recommendations for the Union Budget for FY 2016-17 to Government of India on behalf of its members, representing the telecom service providers. The key recommendations on both direct and indirect taxes, include suggestions on rate of interest, CENVAT Credit, deductibility of spectrum fees paid and tax withholding on distributors margin on sale of SIM cards and prepaid vouchers, etc.
Key submissions on Direct Taxes are as follows:
1.Withholding tax on Spectrum Trading: The Government has recently permitted Spectrum Trading by telecom companies. As per the guidelines, telecom companies which have acquired Spectrum may grant the right to use of the same to other telecom companies. There is some uncertainty on the withholding tax obligation, if any, under section 194J of the Income Tax Act, 1961 (‘the Act’) on payments made in consideration for the Spectrum acquired in the course of the Spectrum Trading. Therefore, a clarification may be issued that payments made in connection with the trading/ sharing of Spectrum are not in the nature of royalty and hence do not attract withholding tax obligations under the provisions of section 194J the Act or any other withholding tax provisions. This would facilitate an effective implementation of spectrum trading in India and reduce/ eliminate any potential tax dispute arising out of such transactions.
2.Characterization of telecom services as ‘Royalty’: Domestic as well as cross-border payments in respect of a wide array of telecommunication services are under litigation on account of retrospective amendment in the definition of ‘Royalty’ vide Finance Act, 2012. The said amendment brings within the purview of Royalty, transmission by satellite, cable, optic fibre, or similar technology irrespective of any actual possession or control of rights, properties or information. The traditional jurisprudence has been that telecommunication services were standard services and hence fee for same cannot be taxed as Royalty under the provisions of the Act and Double Taxation Avoidance Agreements (‘DTAA’) signed by India with other countries. By virtue of this amendment, payments made by telecom companies, even for standard telecom services could be considered as ‘Royalty’ by tax authorities, resulting in protracted litigation not only on characterization but also on the aspect of retrospective withholding of taxes. The same has resulted in an increase in the cost for end consumers in India since such payments are generally made on a net of tax basis, i.e. tax cost in India cannot be passed on to the international operator.
Therefore, to avoid increase in the cost of telecom services for Indian consumers, definition of the term ‘Royalty’ should be amended with retrospective effect to exclude telephony, internet bandwidth and other similar services. Further, in cases of cross-border payments, clarification may be issued that retrospective amendments to the definition of Royalty under the Act shall not be read into the DTAA, as held in numerous judgments by honorable High Courts and the Supreme Court
3.Tax Withholding on Distributors’ margin on SIM cards and prepaid vouchers: Telecom companies sell SIM cards and prepaid vouchers to independent Distributors at a discount, who further sell to Retailers and/ or subscribers. Telecom companies do not withhold tax on discount offered to Distributors on the basis of a position that the discount given is not in the nature of ‘commission’ as Distributors are not agents of the Telecom companies. The Distributors merely act as intermediaries in the distribution channel, in the same manner as Distributors of common consumer goods.
However, tax authorities have adopted a contrary position that tax is required to be withheld on such margins earned by Distributors. This matter is presently pending before the Supreme Court of India, resulting in severe litigation costs for the industry. It is suggested that Government clarify that distributors’ margins on sale of SIM cards and prepaid vouchers is not in the nature of ‘commission’ and hence not subject to withholding tax provisions. Alternatively, the Government may consider prescribing a lower rate of withholding, say 1%, in view of the low margins earned by distributors, and exempting distributors from further withholding tax on retailer margins to avoid multiple tax incidence.
4.Deductibility of spectrum fees: Telecom companies have paid significant fee for acquiring spectrum through the auction route. However, tax treatment of the amortization of such spectrum fees has been a subject matter of diverse and conflicting interpretations under the Income-tax Act, 1961 (‘the Act’). One view, which is logical and in consonance with judicial principles, is that spectrum is an intangible asset and the fees paid by the telecom operators is eligible for depreciation under section 32 of the Act. Another view is that it is in the nature of a ‘right to operate telecommunication business’ and eligible for deduction under section 35ABB of the Act, which results in a significantly lower tax deduction and causes hardship to the telecom operators.
Tax authorities have adopted inconsistent positions while assessing different telecom operators. There is also no judicial guidance on this issue since the matter is presently not sub-judice and is a matter of dispute at lower levels of tax authorities. Hence, there is an urgent need of clarity to dispel the confusion prevailing in the entire industry over this issue. In order to prevent protracted litigation over the matter and proactively settle the tax position in this regard, the Government should issue a clarification that spectrum fees is an intangible asset eligible for depreciation under section 32 of the Act.
Key submissions on Indirect Taxes are as follows:
1.Levy of Swachh Bharat Cess (SBC): The Central Government has imposed SBC at the rate of 0.5 percent on provision of all taxable services with effect from 15 November 2015. Further, it has been clarified by the Government that credit of SBC cannot be availed and SBC cannot be paid by utilizing credit of any other duty or tax. With levy of SBC, the effective rate of Service tax has further increased to 14.5 percent and this would increase the overall cost of telecommunication services for customers. Given the fact that there are multiple other levies such as license fee, applicable on telecommunication industry, SBC should not be levied on telecommunication services.
2.Manner of CENVAT credit utilization: In terms of the deeming provision introduced in CENVAT Credit Rules, 2004 (‘CENVAT Credit Rules’) to determine manner of utilization, an output service provider would be deemed to have utilized inadmissible credit even if he maintains total balance of inadmissible credit as unutilized or maintains a separate ledger account for inadmissible credit and does not utilize any portion of such credit. Such deeming fiction would have an adverse impact in case of doubtful/ disputed availment of CENVAT Credit on account of interpretation of law/ pending litigation. While on one hand the tax payer would be forced to avail CENVAT Credit in its books (due to the restriction on availment of credit within one year of the date of invoice) and on the other hand, such deeming fiction would presume utilization of credit by the tax payer.
Therefore, such deeming provision should be withdrawn immediately from its date of introduction and alternatively, a provision could be introduced for maintenance of regular balance of unutilized credit to the extent of credit inadmissible/ disputed or maintenance of separate ledger account in respect of credit inadmissible/disputed credit, to the extent there is no utilization therefrom.
3.Rate of interest: In the budget of 2014-15, the rate of interest on delayed payment of service tax was increased to 30 percent. This rate of interest is not compensatory but penal in nature and the same should be reduced to a more reasonable rate.
4.Balance of CENVAT Credit of cess as on 31 May 2015: With the increase in service tax rate from 12 percent to 14 percent, ‘Education Cess’ and ‘Secondary and Higher Education Cess’ (“Cess”) have been subsumed in the revised service tax. Upon subsuming of such Cess, there would remain a balance of unutilized CENVAT Credit of Cess if it is not allowed to be used against duty / tax payable. Recently, the Central Government has issued a Notification (i.e. Notification No. 22/2015-CE (NT), dated 29 October 2015) to enable service providers to utilise CENVAT credit of Cess paid on inputs/ capital goods received by an output service provider on or after 1 June 2015 (receipt of invoices post 1 June 2015 in case of input services) against payment of output service tax.
However, the amendment does not cater to the issue of CENVAT credit balances of Cess lying unutilized as on 31 May 2015. Huge balance of such Cess are lying unutilized in the books of the service providers, which are not eligible to be set off against any output Service tax liability. Therefore, it is recommended that a similar amendment be made to allow utilization of such credit of Cess balance available in the books of the service providers as on 31 May 2015.