Why Budget 2016 offers little cheer for telecom sector
“Bombs and pistols do not make a revolution. The sword of revolution is sharpened on the whetting-stone of ideas”.
With a promising growth rate of over 7%, the economy is at an inflection point where big ideas can make a dramatic impact and lead the emergence of the next global economic super power. As it happens to be, the Government’s annual national budget was expected to be ‘the idea’ that transpires into a growth revolution capable of steering the economy on a high trajectory.
Being one of the most critical events in the economic calendar of India, the Government’s showstopper for 2016, its union budget was anticipated to be a carefully balanced and growth oriented agenda with many tax reforms and policies to support the ease of doing business in India.
Programs such as Digital India, Make in India, Skill India, Start Up India had made global headlines and bolstered investor confidence. While these are great announcements, it was equally critical for the budget to provide support at the infrastructure and policy level to realise these dreams. The bucket list was expansive, and the industry certainly hoped for a simplified tax regime that included clarity on critical tax issues troubling the telecom sector. Considering several existing tax provisions were exerting additional burden on an already debt laden sector, the budget offered little relief.
The budget report card for telecom is a mixed bag with hits and misses
On doing a quick assessment of the announcements, here’s what we see:
On the direct tax front, the Finance Minister has sought to clear the ambiguity around the tax treatment of payments made by the telcos towards spectrum fees. A proposal has been made to provide for amortization of the fee payment over the period of life of spectrum. This announcement may not be welcome by telecom companies since it results in ambiguity and litigation risk in respect of spectrum fee paid for prior years, whereby the operators have largely taken the position that spectrum is an intangible asset liable for tax depreciation.
– Rationalization of withholding tax rate on commission from 10% to 5% should be seen as welcome step by telecom operators, although the expectation was that it would be reduced to 2%.
– Further, the industry has to deal with higher withholding tax rate on payments to non-residents who do not have a PAN. In case of tax protected contracts, this becomes cost for the payer. The proposal to reduce this compliance burden and do away with the requirement of a PAN in case of certain specified non-residents is a relief for all players in the industry.
– Certain other key proposals which may have a positive impact on the telecom sector are the proposals to introduce Dispute Resolution Scheme which provides for an option to tax payers to settle their existing tax litigation (including litigation caused due to retrospective amendments), deferment of applicability of POEM based residence test and other tax rationalization measures relating to processing of tax refunds, grant of stay of demand, etc.
– However, certain other key demands of the industry as regards bringing clarity on certain tax issues, have been ignored. Specifically, characterization of discounts offered to telecom distributors, exclusion of standard telecom services from ‘Royalty’, shall continue to haunt players in the industry.
– From an indirect perspective, it has been proposed that the right to use the radio-frequency spectrum and subsequent transfers is a service, and made liable to service tax. Certain amendments have also been made in the credit rules with effect from 1 April 2016, wherein the credit of service tax paid on the assignment of right to use spectrum shall be available in a phased manner over the number of years for which such right is assigned.
– Exemption from Basic Customs duty (‘BCD’) on specified telecom equipment was withdrawn vide amendment in July 2014. There was a parallel notification providing BCD exemption in respect of such telecom equipment. However, now that the exemption from BCD available under this notification has also been withdrawn, certain telecom equipment may be liable to BCD at peak rate of 10% effective 1 March 2016.
– With a view to incentivize Make in India, BCD, Countervailing Duty (‘CVD’), Special Additional Duty (‘SAD’) exemptions are being withdrawn on telecom goods, and, exemptions are being extended to import of parts of such goods. Further, concessional excise duty rates have also been prescribed for manufacture of these goods.
In the past few months, the telecom sector has gained fresh momentum with the introduction of many impactful reforms. While the 2016 Budget is a promising effort to steer the sector, the country’s digital transformation agenda will require catalytic efforts and for strengthening the business climate. On that note, 2016 has just begun and we keep our fingers crossed for a growth positive year in telecom.