Service tax audit of telecom companies may be on the cards, following concerns over the alarming slowdown in the growth of tax revenues from this sector. Service tax collections rose by a mere 4% in FY06, well below the growth in the telecom sector earnings.

Revenues of the telecom sector grew by around 17.6% to top Rs 92,000 crore ($ 20 billion) in FY06 compared to Rs 78,200 crore ($ 17 billion) in FY05, according to the Telecom Regulatory Authority of India (Trai). Service tax revenues stood at Rs 4,092.49 crore in FY06 against Rs 3,934.36 crore in FY05.

The Directorate General of Service Tax (DGST) has voiced concern over the meagre 4% rise in collections, looking at the buoyancy in the telecom sector.

An exercise is underway to pin down reasons for the modest growth, as a possible precursor to service tax audits. Some of the schemes such as free talk time offered to mobile users could come in for closer scrutiny, said official sources.
The mobile subscriber base has been growing at a scorching pace over the last few years. In FY06, there were 140 million telephone users, of which 93 million were mobile subscribers. The subscriber base of mobile phones grew by a robust 78% in FY06 and the growth momentum continues.

The rapid growth in mobile telephone subscriber base should normally translate into higher earnings for telecom companies, however, revenues may have been impacted as these companies have also slashed tariffs, reckons Sachin Menon, partner & head, Indirect Taxes RSM. The government is nevertheless concerned, given that collections from telecom services grew by 46% in FY05 and 71% in FY04 (see table). Telephone services account for over 93% of service tax revenues in the telecom sector.

The spurt in Cenvat credit is being cited as the main reason for the deceleration in collections.This system allows companies to take credit for the duty paid on inputs goods and services and use this to pay service tax on the final product. Simply put, companies do not have to pay cash.

Cenvat credit can be taken on select capital goods as well. Telecom companies have made huge investments in network expansion. In FY06, the capital investment for expansion was around Rs 27,600 crore ($ 6 billion) and this is projected to increase by 15%.

There could be instances where telecom companies may have used the Cenvat credit on capital goods that are not in the specified list. Service tax audits would reveal the correct picture, said an official.