The advent of GST is likely to lead to a sudden spike in effective tax rate to 18-20%.
The passage of the goods and services tax (GST)—possibly one of India’s greatest indirect tax reforms—was an iconic event and will be marked as a milestone in the country’s economic history. The reform, which was in the making for over a decade, has come as a welcome move lauded by the industry as a whole, as it is likely to facilitate ease of doing business, address ambiguities in the current indirect tax regime and bring in a unified tax approach.
While the step brings in its set of cheers, there are granular sector-specific issues that would need further consultation. For the telecom industry, specifically, the bill has come with a mixed bag of opportunities and issues. Grappling with the challenges of high tax levies and a huge debt burden, the sector is already reeling under pressure. The draft GST, however, doesn’t end the sector’s woes.
First of all, the advent of GST is likely to lead to a sudden spike in effective tax rate to 18-20%, up from the current 15%, increasing the overall burden on the financially crunched sector. Operators are likely to pass the burden of the surge to end consumers, thus driving up the cost of provisioning of services.
Another important aspect is the non-uniformity of GST rates across the states—it will be challenging for the telecom operators due to non-alignment of operating circles, including states and Union territories. In the absence of a uniform GST, the parity in pricing recharge coupons for prepaid customers across states will be a concern.
Under the new regime, it is pertinent to determine the state that would receive the revenue of the GST and hence, a telecom operator will need to define as to what will be perceived as the ‘place of supply’ of the service. For instance, in case of SIM cards, it will be critical to determine the place of supply—where the SIMs will be taxed—when the company sells the SIM to the distributor, or when the distributor sells it to the customer, or when the SIM is activated.
The ‘place of supply’ clause also has complex rules around telecom services, including data transfer, broadcasting, cable and direct-to-home. A case in point is that the place of supply for fixed line and leased circuit would be the place of installation. However, it would be a challenge to determine the place of installation, given that the lines and circuits often run across states and subsea.
Intra-circle termination and roaming could be another point of contention. Currently, telecom operators do not have a defined mechanism to track intra-circle termination and roaming supplies. As this is likely to come under the purview of GST under services, it will be imperative to define the place of supply. What further adds to the complexities is the fact that given telcos operate on the basis of service areas/circles, accounting for state-wise revenues would require a massive overhaul of information technology and accounting systems.
One of the biggest impact areas of GST is the compliance requirements that the tax reform brings with it. As against a single registration and merely two-three returns, the proposed legislation would require telcos to file manifold returns per year, apart from separate assessments and audits in each of the states. The concept of credit-matching, being ushered in with the GST, is likely to add to transparency, but would be a hard nut to crack.
One of the biggest drawbacks of GST will be the transfer of responsibility of tax compliance and remittance to customers to make them eligible for input credit. This would extend to credit cycles choking working capital and rise of complexities in the businesses.
The non-levy of GST on the petroleum products has further added to the financial woes of the telecom sector. As the telecom industry is the second-largest buyer of diesel after the railways, keeping these products outside the ambit of the GST regime is a huge dampener. In fact, telecom tower companies stand to miss out on Rs.20 billion-plus a year savings opportunity on their annual diesel bills with petro products still outside the GST ambit.
Although the GST draft appears to have expanded the ambit of credit available, the admissibility of input credits on passive telecom infrastructure still remains ambiguous. In relation to the telecom equipment and services providers, the concept of composite supply needs to be addressed. The draft GST model has given definition of the terms, but more clarity is still under the wraps.
Further, the telecom industry has sought a clear-cut position of the government on levy of taxes on the value-added services (VAS) offered by the telcos. Certain VAS offerings such as ringtones are already under the ambit of state-levied entertainment tax, and now would also be subjected to service tax under the new legislation. Also, the clear inclusion of mobile wallet services within the service ambit or clear exclusion as a transaction in money should be distinctly defined.
Nevertheless, the new tax legislation spells good news for handset makers. The implementation of GST will bring rationalisation of handset prices across states as the additional taxes, including value-added taxes (VAT) and state entry taxes will be eliminated. Eventually, this will lower handset prices and benefit end consumers.
Given the enabling role played by the sector in the socioeconomic development of the country, it is crucial that the policy framework evolves in a manner that helps reduce high cost burdens. The issues around GST need a collaborative approach between the industry and the government, to ensure a smooth transition to the new regime.
Source : http://www.vccircle.com/infracircle/gst-backbone-digital-bharat-threat/