Budget 2018: Industry Expects Simplification of Taxes, Introduction of Key Reforms

By: Vishal Malhotra, Tax Leader, Technology, Media & Entertainment and Telecommunications (TMT), EY India

India currently boasts of being the second-largest telecommunications market in the world which has recorded consistent growth. Telecom sector is the arterial backbone for projects like Digital India, Smart Cities etc. The Government has also brought many reforms for local telecom equipment manufacturers to boost local investment.

Budget 2018 has a lot of expectations riding on it, especially post-demonetization and implementation of Goods & Services Tax (‘GST’).  The industry looks forward for a growth oriented budget to ease the overall business environment and reducing financial stress.  Some of the key asks from this years’ budget are discussed below.

The Budget of 2012 unveiled many retroactive amendments, including the infamous amendment to Section 9 which brought within the tax net transfer of shares or interest in a foreign company having underlying assets in India.  In the same budget, retroactive amendment was brought in the definition of ‘royalty’ which has intentionally or unintentionally brought within the tax net certain standard telecom services (such as mobile / fixed telephonic, internet charges, roaming charges, interconnect charges etc.).  The interpretation of these amendments have been tested before the Courts and the decisions have largely favored the tax payers.  Even internationally, payments for such standard services are not characterized as ‘royalty’, however, the income tax authorities have taken a different view leading to litigations at multiple levels and significant tax demands. Thus, clarification is required with respect to the said amendments to exclude the payments for such standard telecom services from the ambit of ‘royalties’.

With the advent of consolidations in the telecom space, another critical issue faced by the telcos is carry forward of losses and unabsorbed depreciation in case of amalgamation of telecom infrastructure companies.  Section 72A of the Income-tax Act deals with treatment of unabsorbed losses and unabsorbed depreciation, in case of amalgamation of a company owning an industrial undertaking with another company.  The definition of ‘Industrial Undertaking’ as it stands today does not include telecom infrastructure companies due to which such companies are unable to claim the benefit of brought forward losses and unabsorbed depreciation upon consolidation. In order to foster growth in the telecom sector, it is imperative that the benefit under section 72A of the Act is extended to telecom infrastructure companies as well.

Another litigious issue faced by the telcos is the obligation to withhold tax on discounts offered to distributors of pre-paid services. The income tax authorities consider such discounts to be in the nature of ‘commission’ and treat the relationship between the telcos and the distributors as principal to agent (P2A) mandating withholding of tax at source. The telcos, on the other hand have taken a contrary view. Till this issue attains finality from the Supreme Court, the telcos expect a reduction in withholding tax rate on commission from the current 5% (to say 1%) so that the burden of tax demands is reduced. Such a move will also ensure effective cash management for the SIM card distributors of prepaid services who operate on very low margins.

The telecos also expect the government to address the ambiguity on the deductibility of expenditure incurred towards ‘right to use spectrum’ acquired prior to April 1, 2016 as to whether the consideration shall be amortizable under section 35ABB (which provides for amortization of payments made only towards acquisition of a ‘telecom license’) or eligible for tax depreciation. Thus, a clarification to provide that such expenditure would be entitled to depreciation under the Act will be a welcome change.

Post implementation of GST, the budget proposals from an indirect tax side are likely to be focused on Customs. The Government is likely to push the ‘Make in India’ theme and increase customs duty rates on the telecom equipment, both handsets and telecom infrastructure equipment like Base Stations etc. Duty exemptions on major component (PCBs, Camera module, Connectors) may also be withdrawn under the Phased Manufacturing Plan (PMP) introduced for mobile handset industry.

Though the duty differential has brought in new manufacturing facilities in India, however for telecom infrastructure products which do not have a developed manufacturing ecosystem, drastic increase in rates may not achieve the desired intent.

Budget 2018 being the last full Budget from the ruling government, the industry expects simplification of the already cumbersome tax provisions and introduction of key reforms to support the sector’s growth.