As we navigate the pandemic, as individuals and a society at large, we also woke up to the importance of digital communications and more specifically, telecommunications. Economies all over the world were able to contain the damage caused by the Pandemic, thanks largely to robust telecommunication networks.
The pandemic underscored the fact that telecom is as indispensable as electricity. Yet, the unmistakable irony is that it is a sector on the brink in India. One indication of this is the downbeat mood of the telecom operators towards the upcoming spectrum auctions scheduled to commence from 1 March. The primary reason for this are the ghosts of the past, which continue to haunt the Indian telecom sector. This burden of legacy either prevents or allows for weak growth in the sector.
One such impediment is the Adjusted Gross Revenues (‘AGR’) liability which crystallized after the telecom operators lost at the Supreme Court (judgment dated 24 October 2019). This is a liability which some of India’s premier telecom operators will continue to carry for the next decade. Telecom has been an integral part of our growth story so far, and is at the very core of our future growth. 5G transition and the related infrastructure ramp up can potentially lead India’s economic revival and pull the economy out of the temporary slowdown it finds itself in currently. More significantly, it will give a much-needed boost to India’s manufacturing sector through the Government’s ‘Make in India’ program. The Government rightly recognized this and therefore introduced Production Linked Incentive (‘PLI’) scheme for the telecom sector in November 2020, allocating INR 12,195 crores (Press release dated 11 November 2020). This is a welcome move. But, to unleash the true potential of the sector in general and 5G in particular, either this allocation must increase, or this must be supplemented with other tax/ non-tax incentives to encourage players across the telecom supply chain to manufacture in India.
Apart from the AGR issues discussed above and the recent controversy on its computation methodologies, the sector has been bogged down by a plethora of legacy tax issues. Most of the issues under direct tax litigation pertain to the retrospective amendments of 2012. The present government made its disagreement with such amendments quite clear in it’s very first budget by stating that it will not be making any retrospective amendments. A bare minimum logical corollary to this would be to clarify that such retrospective amendments, (a) will not have a bearing on the withholding tax compliances already undertaken prior to 2012 under the old law; and (b) will not alter tax treaty positions. The Income-tax Department has been leveraging these amendments to assume taxing rights under the treaties and the courts have generally been disapproving of such a stance. Another legacy issue which almost every telecom operator in the country has been carrying is the applicability of withholding tax on the sale of pre-paid talk-time vouchers. The nuances of the dispute aside, the larger problem with the argument of the Income-tax Department is that it militates against the very idea of withholding tax which typically casts the onus of withholding on the payer. In this case, however, the Department is seeking to cast that onus on the payees.
On the GST front, the inconsistencies in input credit utilization norms not only adds to the capex bill of the telecom operators but also impacts cash flows. The telecom operators accumulate huge input tax credits through procurement of infrastructure support services provided by telecom tower companies, import of capital goods and the taxes paid under reverse charge on license / spectrum fee paid to the government. However, due to the restriction on their utilization, they don’t translate into any tangible benefit and just keep accumulating in the books.
In summary, Budget 2021, in my view must unshackle the Telecom sector from the chains of the past so that it can play the pivotal role in India’s economic revival, that it is known for and continually capable of. This comes with the added advantage of boosting a number of flagship schemes of the Government like Digital India and Make in India which are inherently dependent upon a vibrant telecom sector.
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