GST Impact: Implications of the new tax regime for telecom

Implications of the new tax regime for telecom

The goods and services tax (GST), which will subsume all indirect taxes and integrate the country into a single market, is arguably the biggest tax reform to be undertaken since Independence. Under GST, the credit of input taxes paid at each stage will be available at the subsequent stage of value addition, which essentially makes GST a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

Parliament has so far passed two key le-gislations concerning the roll-out of GST – central GST and integrated GST. At the state level, Telangana has passed the state GST law and other states are expected to follow soon.

The roll-out of GST will have an impact on all industries, and the telecom sector is no exception. A look at the taxation structure currently governing the sector and the likely implications of GST…

Current tax structure

There are four key commercial activities in the telecom infrastructure space. The first relates to the lease or licence agreement for easement rights on land for erecting towers. The second is the procurement of materials such as tower components, shelters, diesel generator (DG) sets, battery banks and power interface. The third is the on-site erection of towers, and the installation of DG sets and battery banks. The fourth is the sharing of towers, including power backup equipment, amongst telecom operators, and maintenance services.

Under the present tax regime, service tax is levied on the lease/rental transactions for the erection of towers, on-site erection of towers and sharing of infrastructure. These components are eligible for input tax credit. Apart from these, excise duty is levied on the procurement of tower components and the erection of towers, and value added tax (VAT) is

levied on infrastructure sharing, for which the industry has been claiming tax credit but the government has not allowed this so far. VAT is also levied on the procurement of tower components and is not eligible for tax credit.

Currently, service tax is paid on fuel reimbursements as part of the “gross amount” charged for the service. Further, on procurement of diesel, tower companies pay VAT/central sales tax, which is not eligible for credit.

Issues under the present regime

The biggest point of contention between the telecom infrastructure industry and the government today is whether to consider telecom

towers as movable assets or not. Currently, tower companies have to pay excise duty on the purchase of tower components and they have been claiming tax credit on this, contending that the tower components are inputs for their output services to operators. However, the government has disallowed the credit, stating that towers are immovable and hence do not classify as goods.

Another related issue is the sharing of infrastructure. While the industry is of the view that they are rendering infrastructure support services and hence only service tax should be levied, VAT authorities attempt to levy VAT on such transactions, claiming them as “transfer of right to use goods”. There is thus a lack of consistency between tax departments with respect to the movability of telecom towers. While the excise department treats towers as immovable and hence not “goods”, the VAT authorities term infrastructure sharing as the “transfer of right to use goods”.

Changes under GST

The issue of movability of telecom towers is likely to remain under GST. Although the definition of capital goods under GST has been broadened to include goods capitalised in books of accounts, the test of movability has to be satisfied for availing of the credit. Meanwhile, the issue of levy of VAT versus service tax on infrastructure sharing is likely to be resolved under GST because the transfer of rights to use goods except the transfer of title will be treated as “supply of service”.

Since service tax currently is a central levy, tower companies can raise a single invoice and have centralised/circle-wise contracts with telecom operators for multiple states. However, under the GST regime, tower companies may be required to realign agreements and invoicing arrangements state-wise.

Further, dismantling or shifting of towers from one site to another may be treated as “supply” according to the current GST law, if credit is availed of on the tower. Accordingly, tower companies will become liable to pay GST on dismantling or shifting of towers. Alternatively, the reversal of input credit taken may be required for dismantling or shifting towers, in case towers qualify as capital goods.

Currently, the credit of service tax on one-time charges for spectrum rights is available over a period of three years. For a telecom operator that has not availed of the entire input tax credit prior to the GST implementation date, there is no provision under the GST law for transition of the leftover credit.

Based on a presentation by Payal Tuli, Partner, Indirect Tax, BMR Advisers