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Service tax on foreign telecom networks to hit cash flows of IT, ITeS firms
August, 10th 2011

The finance ministry has said use of foreign telecom networks will be liable to service tax in India, dealing a blow to the cash flows of IT, IT-enabled services and telecom companies that may have to cough up past dues.

The levy could also raise international telephony charges for domestic consumers, though telecom companies played down the impact. "Receiving International Private Leased Circuit service from abroad is chargeable to service tax under business support service," the Central Board of Excise and Customs said in response to clarifications sought by the industry on the use of foreign networks.

Most business process outsourcing, IT, ITES and telecom firms lease foreign networks to provide services abroad. They will now have to pay service tax on payments made to the overseas service provider. Although the service tax paid will be eligible for credit against the tax liability, experts say companies will face cash flow issues.

"Even though this would only have an impact on the cash flow as credit would be available on the tax paid, yet there would be huge interest costs for the past period, further pressuring IT and ITES companies already hit by the slowing developed economies," said Bipin Sapra, partner, Ernst & Young.

Leased circuits are covered under telecom services. But as per the Finance Act, a telecom service has to be provided by a person with a licence in India and since the service provider is located out of country he could not be taxed under the 'telecom services' head. The CBEC has now said that though the service cannot be taxed as a telecommunication service it will still be liable to tax under business support service.

However, experts say this service could not be brought under tax in this manner. "IPLC services are specifically covered by the definition of telecom services and are excluded from it as foreign telecom service providers do not have a licence under the Indian Telegraph Act and should not be classified under the Business Support Service which is a generic service category," Sapra said.

A telcom company executive said any move to impose service tax on international long distance calls would have minimal impact on big telcos that largely use their own infrastructure.

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