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No service tax on payments for spectrum purchased before April 1
April, 15th 2016

The government has clarified that telecom companies won't have to pay service tax on payments for spectrum purchased before April 1, even if these are being made in installments, in what experts said would come as a significant relief for the industry.

The government has also allowed telcos to claim credit for taxes in three years instead of the entire lifecycle of the spectrum but has stayed firm on the levy on future auctions.

The Central Board of Excise and Customs (CBEC) has said payment, whether in full upfront or in installments for assignment of the right to use such spectrum, has been exempted from service tax.

The clarification was issued after a Budget provision made all government services including auctions taxable.

The telecom companies had said this amounted to retrospective taxation as it was also applicable on deferred payments of spectrum purchased before April 1. "Service tax is payable on such payments... However, the same have been specifically exempted," the CBEC communication said. This will ensure there is no new tax liability on telecom service providers in respect of services provided in the past. "This addresses concerns of telecom providers," a government official told ET.

Telcos have the option of making full payment upfront or in installments for airwaves acquired at auctions. There was lack of clarity regarding when the liability to pay service tax would arise where the company chooses to pay in installments under the deferred payment option over a period of 10 years.
No service tax on payments for spectrum purchased before April 1
There was concern the move on service tax would jeopardise spectrum buyers' finances since this liability had not been taken into account prior to bidding.

"The exemption to assignment of right to use spectrum for spectrum assigned to the telecom companies prior to April 1will prevent any retrospective taxation," said Bipin Sapra, partner, EY. Sapra said the government had prevented effective loss of credit to the telecom companies by allowing the credit of service tax on such spectrum charges to be deferred to only three years as against the total period of assignment as proposed in the Finance Act.

The industry, however, wants the period further reduced to two years.

"We are very grateful to the finance minister for addressing our concerns and for permitting us to take the offset in the third year rather than the end of 20 years," said Rajan Mathews, director-general of Cellular Operators Association of India ( COAI). "However, we would further request the government to bring it down to two years in conformity with the offset granted to capital assets. Secondly, we have also requested for clarification on whether the interest component of the deferred payment will also attract the service tax, when one finances through the department of telecom." The CBEC has also issued a list of exempted government services to provide clarity on the imposition of tax at 15%, including two cesses. Right of way, licence fees and development rights will attract service tax.

The Finance Act 2015 made an enabling provision to exclude all services provided by the government or local authorities to a business entity from the negative list. These services will now become taxable. The provision, however, does not cover government services provided to individuals.

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