Double taxation and multiple levies hampering growth
February, 15th 2008
The telecom industry is overburdened with taxes. The industry is undergoing a rapid change and dealing with multifarious taxes and levies is cumbersome. The domestic telecom industry ends up paying a significant share of their total revenues towards different levies, compared with their counterparts in other Asian countries.
The two biggest issues surrounding the industry are of double taxation and existence of multiple levies which are hampering the growth of the industry. Both service tax and Vat are consumption taxes which are borne by the end consumers. Ostensibly, these taxes are intended to operate on a mutually exclusive basis. However, the problem is that there are no clear cut definitions in law of what constitute either goods or services. Equally, there are no overriding principles which can be applied in order to come to a determination on the point. Thus, it is entirely possible that what is a service under service tax law is equally goods under Vat law. Consequently, because of this lack of mutual exclusivity in terms of the underlying definitions of goods and services in the respective laws, a particular transaction can possibly be charged to both the service tax, as provision of services, as also the Vat, as a supply of goods.
Interconnectivity charges are payable between interconnecting operators for actual usage of each others networks, to originate, transmit, or terminate a call. Typically, a telecom service provider would make payments to foreign telecom operators for use of latters networks (for its out-roaming customers). One view is that use of network implies use of equipment or process and that payment for such use constitutes royalty taxable in India. Another view is that such payment is for use of a facility which does not constitute royalty. In such case, the payments received by the foreign operators are not subject to tax in India since they are for provision of services and do not involve any type of royalty payments as the term is defined in law. It is submitted that this aspect be clarified to avoid litigation.
The government is encouraging development of the telecom manufacturing facilities within the country and the availability of tax benefits under the SEZ policy.
Units established in special economic zones enjoy income tax holiday under section 10AA of the Income Tax Act for the profits earned in the unit in the ratio that the export turnover of the SEZ unit bears to the total turnover of the assessee.
A plain reading of the phrase total turnover of business of the assessee would result in a situation where the quantum of tax holiday may stand substantially reduced, since the total turnover is not restricted to that of SEZ Unit only. It is hoped that necessary amendment be brought in to avoid litigation on this important aspect.
Further, the rationalization of the multiple levies and introduction of a single levy on telecom revenue has been a long-standing demand of the telecom sector. The special committee, which was set up for examining the taxation issues in the telecom sector, has already submitted its report endorsing the industrys demands to the finance ministry. It is expected that the government would now address the concerns of the telecom industry.
The introduction of the single levy would result in a significant reduction in administrative costs and compliance costs. Further, single levy on telecom revenue will increase transparency. If the aggregate incidence of tax on this sunrise sector were to go down, it would be a very major boost for development.