In a complete break from the existing tax administration for telecom services, the finance ministry has proposed that service providers should be taxed based on the telecom circle once the goods and service tax (GST) regime kicks in. The proposal is aimed at clearing the confusion over how the service, which has an inter-state character, would be taxed under GST.

"Often the originating state and the end use state for a telecom service are different. So it would be difficult to decide which state would be responsible for administering and collecting the tax," a senior official in the finance ministry told FE. He also pointed out, once a phone is on roaming, how do one decide who should collect the tax.

Telecom services would be under the inter-state GST (iGST) regime. Under the plan, the tax once collected from a telecom circle by the Centre would then be divided between the states. At present, the country is divided into 22 telecom circles, which are then classified as metros, A, B and C depending on their revenue potential. Most circles are contiguous with state boundaries, but some states like Maharashtra and Goa are clubbed into one circle. Mumbai classified as a metro circle is separate from Maharashtra and Goa circle.

The recommendation is a part of the finance ministrys response to the discussion paper on GST that was released last month. While the discussion paper has outlined a system of iGST for taxation of interstate sale of goods and services, there was a need for more clarity on the taxation of services that have an interstate character.

Telecom is one of the few services with such a character. The other major inter-state serviceelectricity transmission, has been kept out of the ambit of GST, and states will continue levying their own taxes on it.

Tax experts said that there was a need to prescribe rules for taxing telecom services. "To use telecom circles as the basis for taxing would be a good starting point. But the service provider and the recipient or consumer will have to state the circle of operations in their contract. The service provider would also have to state the circle in its iGST model," said S Madhavan, indirect tax leader, PricewaterhouseCoopers. Other alternatives for taxing telecom services could be the place of residence or the billing address of the recipient or the phone user, experts said.