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Telcos to face special service tax audits
December, 14th 2006

The finance ministry has decided to undertake special service tax audits of telecom companies paying lower amounts of service tax compared to their earnings, but fail to provide supporting evidence to justify the mismatch. The idea is to check for possible tax evasion.

Chief commissioners of various zones have received a formal communication to this effect from the Central Board of Excise and Customs (CBEC). Sources said letters have also been sent to industry associations such as the Cellular Operators Association of India seeking details on revenue earnings and service tax liability of their members.

An internal study conducted by the Directorate General of Service Tax (DGST), Mumbai, made out a case for special audits on telecom companies. There are over 250 service tax registrants, with a few state-owned companies registering as assessees in different locations.

Government officials made it clear that audits will be done only in cases where the companies fail to provide the supporting rationale for the wide mismatch between revenue earnings and service tax payments. If the audit is undertaken, it may cover telecom companies packages to lure consumers, such as free talk time and so on. A spurt in Cenvat credit is also being cited by the finance ministry as a reason for the slowdown in growth in service tax revenues from the telecom sector.

BSNL director (finance) SD Saxena said, With about a 40% share in the Centres service tax kitty, our tax compliance record has been impeccable. We have no problem facing an audit, even though we are a PSU, our books are anyway scrutinised by the CAG.

The telecom industry is witnessing an explosive growth. Revenues topped Rs 92,000 crore ($20 billion) in FY06, against Rs 78,200 crore ($17 billion) in FY05, marking an increase of around 17.6%. Telephone services account for over 93% of service tax revenues in the telecom sector.

The mobile subscriber base grew by a robust 78% in FY06 with the total number of subscribers touching 140 million. However, service tax revenues rose by a modest 4% to Rs 4,092.49 crore in FY06 compared with Rs 3,934.36 crore in FY05. A senior executive from a private telecom company said that the average per unit revenue of the industry was getting cheaper and cheaper due to the hyper-competition under the present regulatory regime.

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