The Goods and Services Tax (GST) Council has decided to impose 18 per cent GST on telecom services, which is 3 per cent higher than the current tax liability of 15 per cent. While the finance ministry claims that the input tax credit under the GST regime will bring down the effective incidence of the levy, the industry believes that the benefits will be minimal and the proposed GST rate will make services more expensive for consumers. Concerns have also been raised regarding the denial of credit on telecom towers. Industry experts share their views on the impact of GST on the telecom sector…
What is your view on the government’s decision to levy 18 per cent GST on telecom services?
Murtuza Onali Kachwala, Managing Director, Protiviti
Murtuza Onali Kachwala
The GST Council, a committee headed by the finance minister and comprising representatives of all states, has decided that telecommunications services will attract a tax rate of 18 per cent. This is three percentage points higher than the current 15 per cent service tax. The Cellular Operators Association of India (COAI), which represents India’s biggest telecom companies including Bharti Airtel, Vodafone India, Idea Cellular and Reliance Jio Infocomm Limited (RJIL), has questioned the logic of the finance ministry’s decision to impose 18 per cent GST on telecom services, while imposing 12 per cent GST on mobile handsets. In its communication to the government, the COAI has reiterated that since telecommunications is an essential-cum-emergency service under the Essential Services Maintenance Act and is availed of by the masses, it is critical that the GST rate must be aligned with the merit rate of tax applicable for essential goods and services, which is well below 15 per cent.
Since the entry of RJIL in September 2016, the telecom sector has undergone a huge transformation, mainly on account of free voice and data services being provided to customers. This has resulted in a reduction in the gross revenue and net revenue for most telecom companies. The consumer’s telecommunication cost has reduced significantly in the past few months; hence, a 3 per cent increase in tax may not impact usage heavily.
Rajan S. Mathews
Rajan S. Mathews, Director General, COAI
While we wholeheartedly welcome the implementation of GST in the country, we are deeply disappointed and concerned with the announced rate of 18 per cent for a critical sector like telecom. The COAI had submitted to the government that adequate consideration must be given to the financial health of the sector and a rate above the existing rate of 15 per cent would significantly hurt the sector and consequently, the end-consumer. Telecom services are key to the economic growth of the country and to the achievement of marquee government programmes like Digital India. The additional costs involved in implementing the new tax reform, coupled with the higher rate, are likely to result in a slowdown in the planned roll-out of communications infrastructure across the country. Telecom service is a necessity and an important infrastructure service. The rate structure prescribed should have been sensitive to these facts. An 18 per cent rate is too high a rate for a necessity.
Meanwhile, some experts have opined that the additional 3 per cent will be subsumed in the reduced value added tax and other taxes. But that notion too is misconceived. It is important to understand that the majority of taxes accrue to the telecom industry by way of services provided by operators provide and the increase of 3 per cent will not bring down the cost of providing these services. At the same time, the additional costs of diesel and electricity consumption have not been taken into account. The telecom industry will continue to face the cascading impact of taxes under the GST regime. These additional costs will ultimately be passed on to the end-consumer, resulting in a 2-3 per cent increase in total monthly bills in the case of post-paid customers. The reverse impact will be felt in the form of reduced talktime and a decline in the uptake of services, resulting in the stunted growth of the industry. The industry seeks a GST rate of no more than 5 per cent, aligned with other essential services.
Spokesperson, BMR & Associates LLP
Spokesperson, BMR & Associates LLP
The GST Council has decided to levy GST on telecom services at the standard rate of 18 per cent, as opposed to the industry’s demand of keeping the tax rate at 5 per cent, at par with essential services. While the higher GST rate of 18 per cent (as opposed to the present rate of 15 per cent) may be offset to some extent with increased credit due to the availability of credit on the procurement of goods and elimination of non-creditable cesses, there may be an increase in the overall tax incidence on such services.
The higher tax incidence may slow down growth in the telecom sector and have an adverse impact on the customer demand. Despite the possible severe impact of higher taxes on the telecom sector, it seems unlikely that the government would incorporate the industry’s demand to lower the rate on such services.
How will the non-availability of input tax credit to tower companies impact the Indian telecom infrastructure sector?
Murtuza Onali Kachwala
Telecom towers are the backbone of telecommunication services. Most importantly, the success of visionary government initiatives such as Digital India, Smart Cities Mission and e-governance services depends on the availability of this critical telecom infrastructure. To encourage these initiatives, it is important that the industry is not burdened with excessive taxes and duties.
In order to achieve the desired goal of expanding the telecommunication business and achieving socio-economic development, it is essential that the costs of telecom service providers go down. This will result in lower tariff rates and a broader consumer base. Seamless flow of input tax credit will help reduce the overall costs and eventually the benefits can be passed on to the end-user by lowering tariff rates. There would be an increase in free cash flow, which can be used for business development opportunities and innovations.
The non-availability of input tax credit to tower infrastructure providers will increase the cost of investment and thereby reduce the speed of penetration of telecom services in rural India. It will also increase the cost of service to telecom companies and ultimately reduce their margins, creating more stress.
“The non-availability of input tax credit to tower infrastructure providers will increase the cost of investment and thereby reduce the speed of penetration of telecom services in rural India.” Murtuza Onali Kachwala
Rajan S. Mathews
Telecom towers are the backbone of the telecom sector. They are essential for the provision of not just voice services but also data and its allied next-generation technology-based services. In November 2016, the model GST law specifically allowed credit on mobile towers. However, under the Central GST Bill, telecom towers have been excluded from the definition of “plant and machinery”. Restriction on the credit of telecom tower could result in a substantial tax cascading and will further worsen the financial health of the sector, which is already saddled with a debt of Rs 4.5 trillion.
We have shared our recommendations with the government that operators should be eligible to claim the credit on telecommunication towers under the GST regime. Telecom towers should be included within the definition of “plant and machinery”.
While the financial condition of the sector has been severely ignored, the policymakers have also perhaps not taken into account the infrastructure still needed to be put in place to achieve the planned targets.
India’s wireless telecom sector has empowered over 1 billion citizens and the country today has one of the lowest voice call rates in the world. India aims to be a world leader in information and communication technology (ICT), but this cannot be achieved without putting in place a massive, robust and tamper-proof infrastructure. The role played by telecom in providing that network and infrastructure is well known to all, but it cannot be undertaken in the present situation where revenue is falling each quarter. The industry, which has invested over Rs 9.2 trillion in setting up world-class mobile networks over the past 20 years, is going through one of its most disruptive phases.
“While we wholeheartedly welcome the implementation of GST in the country, we are deeply disappointed and concerned with the announced rate of 18 per cent for a critical sector like telecom.” Rajan S. Mathews
Spokesperson, BMR & Associates LLP
Credit eligibility on telecom towers has been a matter of litigation under the present regime and several judicial authorities have denied the credit, holding such towers as “immovable property”. The issue relating to credit eligibility on towers is likely to remain contentious under the GST regime since there is a specific restriction on availing of credit on immovable property under GST.
In this regard, it is also interesting to note that the revised GST law introduced in September 2016 contained a provision allowing credit on towers, but the provision has been specifically excluded from the final law, which is indicative of the government’s intention of disallowing credit on telecom towers.
Telecom towers account for a significant share of procurements for telecom companies and denial of credit on towers may lead to a cascading effect of taxes for the industry, which is contrary to the overall intent of GST.
What will be the impact of GST on other stakeholders in the telecom value chain?
Murtuza Onali Kachwala
For customers, telecom services will become costlier with the increase in the tax rate from 15 per cent to 18 per cent. This could result in reduced talktime for prepaid users, who account for almost 95 per cent of the total user base in India.
Following RJIL’s announcement of free/low-cost services, other telecom operators like Airtel, Vodafone and Idea Cellular rushed to match its offers. Consequently, gross revenues have reduced drastically for almost all telecom companies. While consumers have benefited from the sharp drop in prices, the profitability of telecom companies has been hit badly. This has adversely impacted shareholders’ expected returns on investment. The additional financial burden of telecom companies owing to the GST roll-out will force them to trim their workforce heavily to keep operations viable.
Rajan S. Mathews
The telecom sector pays around 30 per cent of its earnings in taxes and other levies, including spectrum usage charges and licence fees. Due to a number of reasons, including hypercompetition and high payouts for spectrum from auctions, the sector has come to a point that can be seen as just short of needing a bailout. The total debt for the sector is around Rs 4.5 trillion, while revenues are around half of this. Tariffs have been going in the opposite direction of inflation.
As an essential service, the telecom industry needs some benefits and tax relaxation in order to provide seamless and
quality services. The industry is working tirelessly to fulfil its goal of connecting every Indian. An additional investment of over Rs 2 trillion is required over the next three to four years.
Telecom operators have already initiated the registration process for migration to the GST regime. However, clarity is still awaited on certain aspects of the published rules and GST implementation is dependent on its compatibility with IT systems. The telecom industry is committed to the successful roll-out of GST on its scheduled date of July 1, 2017, provided that the clarifications sought are given in a time-bound manner.
With over a billion subscribers, the telecom sector is key contributor to the Indian economy in terms of consumer benefit, employment, revenue generation and GDP. The sector contributes 6.5 per cent to the country’s GDP. Cumulative foreign direct investment inflows into the sector were around of Rs 927 billion as of March 2016. In terms of employment, the sector generates 2.2 million jobs directly and 1.8 million jobs indirectly.
The telecom industry also provides the backbone on which flagship government schemes will be rolled out. In due time, these schemes will bring in a revolution that will make India the foremost ICT leader in the world. All this will be made possible with the honest hard work put in by the industry. But that does not mean that the industry can be stripped of its last penny and made to survive on nothing.
Spokesperson, BMR & Associates LLP
It is unlikely that the increase in the GST rate on such services would be completely offset by a corresponding increase in credits on such services. As a result, the overall tax incidence on such services may increase and these may ultimately become expensive for consumers. However, business customers may not get adversely affected since tax on services should be creditable for them.
“The higher tax incidence may slow down growth in the telecom sector and have an adverse impact on customer demand.” Spokesperson, BMR & Associates LLP
