A group of telecom companies has termed the Union Budget proposal to levy service tax on spectrum allocation "punitive and unfair" and want the levy to be rolled back, saying it would lead to a Rs 77,000 crore tax burden and tariff hikes. "It is imperative that the government reconsiders the service tax proposals in view of the direct impact on the aam aadmi as also the adverse impact on the Digital India initiative," the Cellular Operators' Association of India said in a statement Sunday.

It said that in the spectrum auction lined up later this year, where the reserve price is likely to be about Rs 5.36 lakh crore, the industry will have to cough up a minimum of Rs 77,000 crore as service tax.

"This is a substantial financial burden on the industry, which is reeling under debt," the COAI said. The association represents top operators Bharti Airtel, Vodafone India and Idea Cellular, among others.

In his budget speech on February 29, finance minister Arun Jaitley proposed to declare the assignment by the government of the right to use radio-frequency spectrum and its subsequent transfers as a service — and not a sale of intangible goods — on which service tax can be levied. COAI said all government services have been made liable to service tax to be paid by recipients with effect from April 1. The government also proposed that the Cenvat credit of the tax imposed on such assignment be deferred over the duration of the license period.

COAI said the deferral of credits will mean that the industry will be burdened with a minimum effective cost of Rs 40,000 to Rs 50,000 crore. "It is worth noting that what is meant to be a 'zero cost' in the Cenvat credit system for any operator who has adequate output service tax will convert up to a 71% cost of the tax imposed. The cost on account of deferral of credit would severely impact the health of the telecom industry," COAI said. Credits of service tax imposed in respect of received services are available immediately on receipt of invoice or payments. Even in the case of capital goods, the benefit of credit is available within an average period of six months over two financial years, COAI said.

COAI also sought clarification on a proposed income tax amendment to grant deduction from income of an appropriate fraction of the expenditure incurred on acquiring the right to use spectrum and for which payment has actually been made. A telecom operator can pay for spectrum acquired in full or in instalments over a period of time with interest. The instalment facility is given primarily to mitigate the financial burden on telecom operators.

The proposed Section 35ABA of the act can be misinterpreted that deduction is to be allowed from taxable income only of an appropriate fraction of instalments paid and not of the actual bid amount incurred while acquiring spectrum, COAI said. This could lead to penalising carriers that opt for instalment schemes by deferring deduction vis-a-vis where bid amounts are paid upfront to the government, the body said.