Published Editorial

Budget 2013 - Telecom yearns rational tax environment

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Voice & Data

by

Vishal Malhotra
Tax Partner - Telecommunication services
EY

In the recent years, the telecom sector has unquestionably emerged as one of the key drivers to the growth of Indian economy. However, the increasing competition between the players is certain to affect the business dynamics of this sector. As massive growth is expected on account of additional consumer base and emergence of the market for value added services, a favourable Budget can further boost the progress.

The countdown to Budget 2013 has begun and the telecom sector awaits the cushion of a rational tax environment both at the national and state levels. Some of the key expectations include:

Reduction of rate of TDS on margins of market intermediaries of pre-paid vouchers and on payment for roaming charges:

While selling pre-paid products, most telecom operators enter into ‘principal to principal' arrangements with the intermediaries. However, tax authorities often treat intermediaries as agents of telecom operators thereby alleging that difference between the Maximum Retail Price (MRP) and the price at which it is made available to the intermediary is in the nature of commission and accordingly, tax @ 10% should be withheld on the margin allowed to the distributor. This has resulted in unnecessary litigation and is causing financial hardship to telecom operators. Accordingly, the withholding requirement may be abolished or restricted to 1% as opposed to the current 10%.

Withdrawal of retrospective expansion of definition of ‘Royalty' and ‘Process':

Finance Act, 2012 (FA 2012) introduced retrospective amendment to the definition of "process" which is now deemed to include transmission by satellite, cable, optic fibre, or any other similar technology including uplinking, amplification, downlinking of signals. This may result in inclusion of payments made by Indian telecom operators to other service providers for international private leased‑line circuits, satellite usage charges, etc. The above amendment could also be interpreted to bring within its ambit, payments made by telecom operators to other operators for interconnect, roaming, etc, which would result in significant litigation for the telecom operators in India. Accordingly, the expanded definition of "Royalty" should be withdrawn and even if the same is retained the change should be made prospectively.