According to Kotak Institutional Equities, Bharti Airtel and Reliance Jio could face potential tax demands exceeding Rs 140 billion due to the Supreme Court’s recent decision on licence fee categorisation. The judgment stipulated the treatment of the annual telecom licence fee as capital in nature, a departure from its previous classification as an expenditure.
Kotak Institutional Equities estimated that, excluding penalties, Jio could potentially face a tax demand of Rs 84 billion, while Airtel could face a potential tax demand of Rs 60 billion for 2020-23. As per Kotak, prima facie, the accounting change would lead to higher earnings before interest, taxes, depreciation, and amortisation (EBITDA)/profit before tax (PBT) and lower cashflow on higher tax outgo initially, but would likely even out over the license holding period. The brokerage firm believes that the income tax authority could raise demand for the shortfall in taxes for the prior period, along with applicable penalties, which could lead to a potential significant one-time impact. Kotak added that the tax outgo would decline in later years, as amortisation benefits accumulate and overall tax outgo would remain broadly similar over the licence period.
For telcos that have completed the initial 20 years of the licence, Kotak notes that the past tax shortfall would likely pertain only to the difference in payment timings and change in tax rate. However, there could be a significant impact of tax shortfall if the telco is yet to complete the initial 20-year licence period or for the period after licence renewal. The firm added that telcos would likely file a review/curative petition in this case and the actual tax liability (if any) could get delayed.