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In view of the current government’s ‘Digital India Initiative’ having a responsibility to transform the country into a knowledge-driven economy, the telecom sector has a big role to play. Not only this, the sector is expected to experience a major fillip in the growth substantiated by increased non-voice revenues and an ongoing higher penetration in the rural market.
The sector currently operates in three area of services: (1) telecom service providers, (ii) passive infrastructure service providers, and (iii) telecom equipment manufacturers.
As far as the tax implications on the telecommunication sector are concerned, they commenced with the advent of service tax more than two decades back in 1994. Although the sector has been a major contributor in indirect tax revenue generation for the government, it has a history of facing various issues on the indirect tax front. However, experts say once the GST is rolled out, not only the telecom but also the whole service industry will have an all-time easy tax structure.
One of the major concerns for telecom service providers is the denial of Cenvat credit on telecom towers, and this has resulted in tax cascading thereby rendering the service uncompetitive. The main issue is whether goods constituting the telecom tower qualify as “capital goods” or “input”. While capital goods and inputs have been exhaustively defined under the current provisions of Cenvat Credit Rules, 2004, there is no specific mention on the admissibility of Cenvat credit on telecom towers being plant and machinery used for business. Following which, it results in impacting the whole telecom industry as it increases the cost of passive infrastructure.
That apart, it is also important to consider that the telecom industry is not plagued with taxes and duties as will deter the spirit of government initiatives including the Government of India’s ‘Digital India campaign’. The policy-makers in the Government have tried to bring out clarity in terms of eligibility for tax credits with the unveiling of model GST law on November 26, 2016.
To achieve the desired goal of expanding the telecom business and accomplishing socio-economic development, it is pertinent that the cost of the telecom service provider goes down, which will result in lower tariff rates and broader consumer base. The proposed GST framework seems to have addressed the concerns of the telecom sector.
The seamless flow of credit under the GST regime, if made possible, will help reduce the overall cost and eventually the benefit can be passed on to the end-user by lowering tariff rates. Following which there will be a significant increase in cash flow, which can be later used in business development and innovations to support the Digital India initiative.
The telecom sector, with its mammoth outreach to more than approx. 1.12 billion subscribers cutting across state boundaries, is one of the India’s core economic drivers. Laden with high debt pile and in need for greater investment, the sector currently faces several issues on the indirect taxation front as well. Viewing this, the telecom sector has huge hopes from the proposed GST regime. Though the proposed GST draft doesn’t seem to bring an end to the sector’s woes so immediately, slowly but surely the tax reform is to benefit the sector in the long run.