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Telecom spectrum set to fall in service tax net as mop-up growth slows
February, 18th 2015

An unexpected fall in service tax collection growth this fiscal coupled with the philosophy of broadening the tax base will result in the inclusion of more services into the tax net in the coming Budget, and a notable addition could be the sale of telecom spectrum.

Given that proceeds from the ongoing telecom “spectrum allocation” are seen to be close to R1 lakh crore, a third of which is expected this fiscal, the new impost on the disbursal of this resource itself could enrich the exchequer by upwards of R4,300 crore at the current tax rate of 12.36%.

Currently, sale of spectrum is not on the 17-strong negative list, introduced in Budget 2012-13; neither is it on the exempted services list of 39.

The lack of mention is presumably because spectrum being a natural resource was never conceived to be a service. According to sources, the government is toying with the idea of treating spectrum as a service (which would require an amendment in law) and a taxable one.


Service tax, introduced two decades ago, has since grown to become the largest source of indirect tax for the government (as per Budget estimate for 2014-15, the service tax proceeds are, for the first time, seen higher than that from excise and customs duty at R2.16 lakh crore).

While service tax receipts were originally projected to grow at 30.5% this fiscal, the growth in April-January was a modest 8%, giving reason for the finance ministry to widen the tax base further, especially in the context of the low overall tax buoyancy.

Services provided by central and state governments — except a few like Speed Post, travel by railway in higher classes, services provided by security agencies like police to private parties and transportation of goods — are on the negative list right now and, hence, not taxable.


These apart, many services like clinical trials, healthcare services, stockbroking, etc, are exempt.

According to sources, the finance ministry may bring sale of spectrum to telecom companies within the ambit of the tax by way of a reverse charge. That is, the spectrum buyer would pay service tax to the government upfront at the time of paying for the facility but would eventually be able to take credit for the tax paid against his output tax liability.

“This would not affect telecom operators using spectrum already acquired. Those who bid for fresh spectrum would have to pay service tax upfront and take credit after services are rolled out in a few years, which would mean a short-term cash flow problem for them,” said a person familiar with the development.

Budget 2014-15 estimated revenue from “other communication services” at Rs 45,471 crore, but this includes the licence fee and spectrum user charges apart from the revenue from spectrum allocation, which is now seen at close to Rs 35,000 crore given the option of deferred payment to telcos. Companies could make a third of the payment in the first year, followed by a two-year moratorium and another 10 instalments; the tax revenue would flow in accordingly.

The government had raised Rs 40,847 crore last fiscal and Rs 18,902 the year before from “other communication services”.

While most services rendered by the government are out of the tax net, the law already provides for levying service tax on support services by the government to businesses.
“The authorities may look at expanding the list of (taxable) declared services and restricting the scope of exemptions,” said Saloni Roy, senior director, Deloitte.

Finance minister Arun Jaitley had in his previous Budget too pruned the negative list as well as the exemptions, bringing into the tax net all advertisements except those in the print media, AC contract carriages and technical testing of new drugs on humans.

Satya Poddar, partner, EY, said the high services tax growth in the previous years was mainly on account of widening of the tax base achieved by the introduction of a system of taxing all services except those in the negative list. In the years to come, although higher compliance level could contribute some growth, service tax revenue growth to the state would be broadly in line with the growth rate of the economy. Before the 2012-13 Budget, service tax was based on a positive list that last had 119 taxable services.

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