Over the past few months, there has been significant progress on Goods and Services Tax (‘GST’). GST is the most significant indirect tax reform proposed to be implemented in the history of Independent India. A GST regime aligned with overall objectives of removing the cascading, unifying the Indian market, simplifying administration and compliances and ease in doing business may prove to be a catalyst for economic growth and sustainable development in India.
With the Government now advancing towards making 1 April 2017 a realistic deadline, the Telecom sector foresees GST implementation as a positive step to match with growth potential of the overall industry.
In this backdrop, the key impact points/ open issues proposed under the GST regime relevant for the telecom sector are encapsulated below:
Need for single registration in light of a unique regulatory landscape:
From the regulatory perspective, India is divided in 22 Service Areas/ Circles for providing cellular mobile services. Out of those 22 Circles, 12 of such Service Area/ Circles cover more than one State *.
Due to overlap of Circle and State boundaries, under GST telecom operators will be required to maintain separate accounts for States in addition to mandatory Circle-wise accounts as per regulatory framework. Multiplicity of accounts might lead to reconciliation issues and increased costs due to redundancy.
Further, the requirement of shifting to multi-point tax in state-wise registrations scenario under GST regime from the single point tax scenario under service tax regime may lead to multi-fold increase in complexities and compliances, which would entail telecom operators to completely overhaul their IT and accounting systems. To overcome said challenges and complexities, it is imperative to allow telecom operators to obtain pan-India single registration.
Location of telecom operator:
Telecom services are provided seamlessly across geographies with telecom equipment spanning throughout States, and hence, it is not possible to determine the location from where services are supplied. Further, the definition of the location of service provider is fairly vague and the state from which tax is to be deposited also becomes a contentious issue leading to significant amount of litigation. This aspect needs to be addressed since tax compliance would be based on location of supplier of service.
Lower and Uniform tax rate:
One of most important factors for achieving the synergies of a single National Market would be to have an appropriate Revenue Neutral Rate (RNR) which acts as catalyst for growth of Key sectors (one of which is telecom), which in turn could act as an engine for growth of the entire economy.
A lower RNR in case of telecom supplies is much needed for achieving this objective. As a sector, telecom has a direct impact on the lowest strata of the society, and is also designated as an essential service under the Essential Services Maintenance Act, 1968.
Further, current regulatory guidelines mandate tax-inclusive pricing for pre-paid offerings. If GST rates vary across States, there is a possibility that subscribers of a multi-state circle may get different talk-time amounts for same recharge made in different States which would lead to confusion in minds of customers. Further, multiple tax rates are also against the basic foundation of ‘one nation one tax’ under GST.
Additionally, telecom operators might be required to incorporate multiple rates for different transactions in already complex and myriad IT and accounting systems.
Taxation of self-supplies and tax cascading due to credit restrictions:
Under the current regime, service tax is not applicable in case of self-supplies. However, under GST regime, state tax authorities may seek to tax transactions involving two states covered by one multi-state Circle even when charges are not to be recovered for such intra-circle transactions as per regulatory framework, leading to ambiguities relating to valuation and unwarranted litigation.
Removal of tax cascading and rationalisation of credit is at the very heart of the GST framework. The telecom industry, therefore expects that credit mechanism under GST should be broader to ensure that current tax credit leakages/ restrictions on inputs required for telecom infrastructure (like tower and tower parts, diesel and electricity) are completely eradicated.
Considering the open issues and challenges under proposed GST regime, the telecom industry should use the current window of opportunity and engage with the Government to iron out the issues and anomalies well before the GST law is finalised.
*Reference can be made to draft Unified License Agreement on DoT website http://dot.gov.in/sites/default/files/Unified%20Licence_0.pdf (Refer Annexure 5 on page 166)