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Move to impose service tax will push up tariffs, hurt bidding at auction: Telecom companies
April, 06th 2016

Telecom companies have warned that the finance ministry's proposal to impose a 15% service tax on all spectrum allotments, including auctions and trading deals, would cost the industry Rs 30,000 crore in the first year, forcing telecom operators to raise tariffs.

The move would not only make the cost of acquiring spectrum higher by 47-71%, dampening the bidding interest in the upcoming auctions, it would also cut into the telcos' corpus required to expand services like 3G and 4G, telcos wrote in a letter to the Finance Minister Arun Jaitley on Monday.

"The proposed levy of service taxes on spectrum, estimated at Rs30,000 crore (in one year itself), industry wide, will further push the industry teetering to the edge of financial distress," Cellular Operators Association of India (COAI) said, representing concerns of the industry which was already reeling under Rs350,000-crore debt. COAI represents top telcos such as Bharti Airtel, Vodafone India and Idea Cellular, besides newcomer Reliance Jio Infocomm.

"It is evident that this incremental tax cannot be absorbed," the lobby group added, seeking a meeting with Jaitley to present their case of limiting the proposed service tax to spectrum trading deals.

Levying 15% as service tax would impact ability of telcos to participate in the upcoming auctions, while equally impacting the government's Digital India program and its attempt to increase rural penetration of data services.

"This will materially affect and dent ability of operators to bid in future auctions, while impacting some from a survival perspective itself," the lobby group emphasized.

In his Budget speech on February 29, the finance minister had 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 proposal is "unintentionally punitive and is evidently resulting in material distortion and discrimination to the industry", COAI said.

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 that credit on spectrum trading deals should not be deferred, since that would be a further double whammy for the industry.

Arguing against imposing of tax on spectrum assignment, which was a sovereign function, COAI said the government would be creating a tax cascading impact which will adversely affect operators working on thinning margins and EBIDTA of 20%.

"They will find it difficult to set off this additional tax and will end up with cash blockages and/ or bear this as additional cost," 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, for the relevant assessment years, and not exceeding the license period.

The proposed Section 35ABA of the act can be misinterpreted and lead to incorrect deferral of deduction for spectrum amounts. The lobby has demanded the government clarifies for ensuring past stands taken by industry do not get questioned or litigated.

 
 
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