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Clearer interpretation of tax laws needed
February, 25th 2016

The telecom sector, once the poster boy of reforms, has now turned into one of the biggest revenue earners for the Centre.

Every Budget for the past five years has focused more on what the exchequer will receive from spectrum auction and other levies than on incentivising telecom infrastructure creation.

“Although the subscriber base has crossed a billion mark in India, making it the second largest market in terms of subscriber base, the full potential of telecom has not been realised,” said Hemant Joshi, Partner, Deloitte Haskins & Sells LLP.

This is ironic because on the one hand the Centre has been stressing on digital inclusion through greater mobile and broadband penetration, but on the other the industry is reeling under high levels of debt and levies.

“Reduction in MAT rate, clarity on amortisation on spectrum acquired through auction and on TDS deduction on sale of talk time to dealers are some of the focus areas for the Budget. Incentives for small mobile payments, green initiatives, etc would go a long way in strengthening the telecom Industry,” said Joshi.

Spectrum trading
The Centre recently permitted spectrum trading by telecom companies. But there is uncertainty on the withholding tax obligation. “A clarification may be issued that payments made in connection with the trading/sharing of spectrum are not in the nature of royalty and hence do not attract withholding tax obligations,” said Rajan Mathews, Director-General, Cellular Operators Association of India. Telecom companies have paid significant fees to acquire spectrum through the auction route. However, tax treatment of the amortisation of such spectrum fees has been a subject of diverse and conflicting interpretations.

One view is that spectrum is an intangible asset and the fees paid is eligible for depreciation under Section 32 of the IT Act. Another view is that it is in the nature of a ‘right to operate telecom business’ and eligible for deduction under Section 35ABB, which results in a significantly lower tax deduction. “Tax authorities have adopted inconsistent positions while assessing different telecom operators. Hence, there is an urgent need for clarity to dispel the confusion,” added Mathews.

Also, no income-tax incentives are available for investments in mobile phone manufacturing. “It is strongly envisaged that substantial investment opportunities can be created in this sector over the coming years based on the introduction of a tax holiday.

“An analysis of the robust mobile handset manufacturing industry in China and Vietnam would indicate the fact that incentives — especially tax holidays and export benefits — compelled the industry to move to these destinations,” said Pankaj Mohindroo, President, Indian Cellular Association

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