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Service tax to be levied on spectrum trading deals
March, 02nd 2016

The government has Monday said that a service tax on spectrum trading deals will be levied, which can be credited back, providing much needed clarity on spectrum trading deals.

Some however were wary of what the ultimate outgo would be and whether the move would make spectrum deals more expensive.

Finance minister Arun Jaitley said in the Union Budget Monday that assignment to right to use radio frequency spectrum will not be taken as a sale of intangible goods and therefore will be liable to service tax.

"I propose to amend the Finance Act, 1994 so as to declare assignment by the Government of the right to use the radio-frequency spectrum and its subsequent transfers a service, to make it clear that assignment of right to use the spectrum is a service leviable to service tax and not sale of intangible goods," Jaitely said in his speech.

"There was a confusion on spectrum trading. Now, the FM has clarified that there will only be service tax, which is very good, else spectrum trading or sharing would have become very expensive," Prashant Singhal, global telecommunications leader at consultancy firm EY India.

"This will induce more spectrum transactions and less litigation. This also clarifies that spectrum is service and not an asset sale," he added.

However, some were unsure of what the final impact will be and was critical of the finance minister's statement.

"Going forward, this could impact consolidation," said Ashok Sud, Secretary General of AUSPI, the lobby body representing pure CDMA operators like Sistema Shyam Teleservices and dual-tech players like RCom and Tata Teleservices.

"We are yet to assess the final cash-flow impact as spectrum buyer as it may be entitled to some Cenvat credit," Sud added but said that prima facie, it appears that spectrum trading deals will become more expensive in future, as a telco buying the spectrum will have to shell out an extra 14% odd as service tax to the government on total spectrum purchase consideration.

Ex-VSNL chairman B K Syngal, now Senior Principal, Dua Consulting, said that the FM's move may force telcos buying such airwaves through the trading route to pass on the higher costs on the consumer by way of higher call and data charges.

"Why should an input cost like spectrum attract fresh service tax, when telecom services already attract the levy," he questioned.

The Cabinet had on September 9, 2015 approved long-pending norms for spectrum trading, providing an exit route for financially stressed mobile operators saddled with unused airwaves and allowing those facing a shortfall to get much-needed frequencies. There was confusion on whether the deals would come under the ambit of service tax or be liable for levy of value added tax (VAT).

In case of service tax being applicable, a company paying the tax will get the benefit of it in its tax liability, which will ultimately be credited back. So, it's only a cashflow impact but no loss of tax, EY's Singhal said.

At present, service tax is 14.5% countrywide, but VAT varies between 5% and 15%, depending on the state. While telcos can offset the service tax payment, no such relief will be available in the case of VAT.

Had telcos been asked to pay VAT on spectrum trading deals, the spectrum sale value could have risen accordingly, making the deal more expensive.

 
 
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