GST Impact on the Telecommunications Sector: GST – possibly one of India’s greatest indirect tax reforms – proposes to unify the multitude of indirect taxes in India and bring all goods and services under a single GST. The telecommunications sector has become one of India’s core economic drivers, India is only second to china in term of the number of connections and subscribers, the sector is also among the top five employment generation in india. Telecom sector of India can basically be divided into three parts, the telecom service providers, infrastructure providers and equipment manufacturers. Now check more details for “Impact of GST on Telecommunication Sector” from below…
Impact of GST on Telecommunication Sector
Present Taxation for Telecommunication Sector
In the present scenario, this sector could be broadly divided into three segments: telecom service providers, infrastructure providers, and equipment manufacturers. Although the emergence of the latter two is thanks to the former, their importance in terms of the telecom sector as a whole is crucial. Given the mammoth volume of subscriber connections and the revenue generated from this sector, it is evident that the telecom industry is due for a serious overhaul with the evolving indirect tax scenario i.e. the introduction of Goods and Services Tax (GST).
Place of supply for telecommunication:
Currently, in cases where both the telecom service provider and service receiver are in India, services would accrue at the place of service receiver through Rule 3 of the Place of Provision of Service Rules; but given its central nature, the complications of chargeability were not pondered upon in depth.
However, under GST, it would be pertinent to determine the state that will receive the revenue of the SGST so paid and hence, the telecom companies will require a detailed explanation as to what could be perceived as the Place of Supply of Service. Subscribing to the Destination Principle, we believe that there are two major possibilities for recognising place of supply, one being the Place of Service Receiver (permanent registered address) or the Location of Service Receiver (tracked per second by the telecom tower the receiver is utilising). However, based on feasibility, the former (Place of Service Receiver) could be a likely favourite among lawmakers.
Sale of SIM cards:
sale of goods or provision of service? The crux of the various judicial rulings is that the amount received by the cellular telephone company from its subscribers towards SIM cards will form part of the taxable value for levy of service tax as the SIM cards on their own, without the services, would hardly have any value. However, there is a contradiction, wherein certain state VAT legislations (e.g. Andhra Pradesh, Goa, Gujarat, etc.) have specifically included SIM cards in the VAT schedules. So it is not clear whether sale of SIM cards is a sale of goods or provision of service.
Under GST, it would be critical to understand how the same would be treated – as goods or services or a comprehensive definition of goods and services would be introduced to eliminate this problem of double taxation faced by the sector. Furthermore, other points for consideration are where SIM cards shall be taxed i.e. what shall be the place of supply – when telecom companies sell the SIM card to distributors, when the distributor sells the SIM card to the customer, or when it is activated by the customer? Would tax be levied on each point of sale and would the tax revenue be distributed among the states accordingly or would tax be levied on the initial sale transaction exempting the subsequent sale transaction? Furthermore, under GST legislation, it would also be vital to evaluate the state that shall be eligible for revenue of SGST.
Presently, the telecom industry faces several shortcomings such as the cascading effect of taxes, issues with the classification of services, etc. that hamper the growth of this sector.
GST Implementation on Telecommunication Sector:
- Change in the system of taxation: Currently, selling of recharge vouchers to agents/distributors is exempt from service tax as per Mega exemption notification no.25/2012 dated 20 June 2012. The liability to pay Service tax on the Maximum Retail Price (MRP) (which includes the agent’s/ distributor’s margin) is on the telecom industry. As the GST law currently reads, in the absence of MRP-based valuation for the telecom and specific exemption to the distributors, it appears that each leg of the sale of SIMs would be subject to GST. This would mean that the distributors and all retailers in the supply chain would get taxed.
- Mobile Wallets There are several diversities that exist among the telecom companies that engage in a number of telecom services which includes mobile wallets. These need to analyze and each of its nature needs to be evaluated to gain knowledge of the impact of such transactions. This is, however, a very complicated process because the telecom companies make payments that include bank license by which they start their operations. Top telecom services providers including Airtel and Vodafone have already launched their mobile wallets, airtel money and Vodafone M-pasa. Most mobile wallets in India follow either the closed model or the semi-closed model, which restricts the utilization of credit to a specified set of services. The indirect taxes implication on mobile wallet services remains clouded as several councils across India have different opinions regarding its point of taxation under GST regime.
- Unveiled cenvat credit relating to one time charges for spectrum assignment: Presently, cenvat credit for service tax paid on one time charges for assignment of right to use any natural resources is spread equally over a period of three years as per the CCR, 2004, The GST law does not envisages any mechanism for carry forward of such unveiled credit.
- No provision for transition of input tax credit relating to goods purchased: Under the current regime, telecom are not eligible to avail credit of the tax (VAT/ CST) paid on purchase of goods. However, under the GST regime, telecom would be allowed to avail such input tax credit for rganizatio against output GST liability. Currently, there is no specific transition provision under the GST law which permits a telecom to carry forward such taxes paid under the present regime for rganizatio against GST liability.
- Cenvat credit on towers: Infrastructure providers also known as tower companies are one of the three broad segments of the telecom sector. In this regard, it is relevant to refer to BHARTI AIRTEL LTD V/S COMMISSIONER OF CENTRAL EXCISE, PUNE wherein credit on the towers, its parts thereof and pre-fabricated building material used for providing telecommunication service, was denied on the grounds that the goods under consideration would neither qualify under the definition of ‘Capital goods’ nor input defined under cenvat credit rules, 2004 accordingly due to the factor of immovability in the goods there is a ambiguity with respect to availing such credit. Under GST, it would be interesting to understand whether such ambiguity would continue or if there would be some certainty with no restrictions on availing credit.
- Compliance requirements: Currently, most telecom have obtained rganizatio Service tax registration certificate and undertake rganizatio compliances. However, under the GST Law, separate registration would be required in each State from where the services are rendered. Accordingly, telecom could be required to obtain registration separately in each State from where the services are rendered leading to increased compliance requirements as compared to the current regime.
- Call charges, Data rates may go up if the tax rate in the GST regime exceeds 15 %.
- The entire telecom companies may need to be revamped to accommodate a state level, GST driven mechanism and processes.
- Removal of Cascading Effect.
- Compliance cost will increase.
- Changes agreement with various suppliers, customers, Etc.
- Tower firms won’t be able to set off their input duty liabilities because petro-product continuous to stay outside GST framework.
- A new GST clause considering the proposed GST may have to be created to replace the existing indirect tax– related clauses under the agreement with various suppliers, customers, etc.
- Considering the probable implications of the proposed GST legislation, companies may consider reevaluating alternative business structures for undertaking operations.