The mobile and telecom revolution in India in the past decade has been so stark that in December 2015, the number of mobile-phone subscribers reached nearly 1 billion, making India the only country after China to cross such a feat and achieve the milestone. Much of the credit for this needs to be given to the government which has taken keen interest in the sector and has provided a fertile and business friendly framework for the industry to operate and grow. The efforts of the Finance Ministry are imperative among all and in furtherance of the same, the expectations of the mobile and telecom industry are quite high with the upcoming Budget of 2016-17.
By the way of the present article we wish to highlight a few of the issues and challenges which the telecom sector is facing currently and what lies ahead for the sector.
Availment of CENVAT Credit On Capital Goods
Owing to various conflicting views that have been held by various courts across the country on the availability of CENVAT credit on the ‘passive telecom infrastructure of tower and shelter material’, there lies great confusion which needs to be addressed by the government of the day and settled the matter once and for all.
The confounding treatment of CENVAT Credit availment finds is genesis in the arbitrary treatment of the issue by disallowing CENVAT claimed by the telecommunication sector against the tower and shelter built by various companies. As it stood, the earlier stand taken by different Tribunals across the country was that the towers and parts thereof are fixed to the earth which on installation become immovable and as such can neither be considered as capital goods nor input for claiming the CENVAT credit as per CENVAT Credit Rules, 2004.
The direct impact of such a perverse view adopted by the Tribunals majorly effected two segments of service providers i.e. telecom service provider and passive telecom infrastructure service provider.
Again, few of the recent judicial pronouncements complicated the issue even further. In the matter of ESSAR Telecom Infrastructure Ltd. [TS-314-CESTAT-2015-ST], the Tribunal allowed credit of tower and shelter as capital goods to passive telecom infrastructure service provider but created a distinction between the telecom service provider and passive telecom infrastructure service provider by maintain that ESSAR was providing service under ‘Business Support Service’ not under ‘Telecommunication Service’ as in the case of telecom service provider. At present, it is illogical that how the capital goods credit which is allowed for the passive telecom infrastructure service provider (providing Business support service) is disallowed in the case of telecom service provider (providing Telecommunication Service). This has resulted in great disparity the two service providers.
On the contentious issue as discussed above, the Hon’ble Supreme Court has admitted Vodafone’s appeal and extended a stay against the Bombay HC decision dated 10 September 2015 which affirmed non-entitlement of CENVAT credit on tower and parts thereof and shelters used for providing telecom service. A similar appeal is pending before the larger bench of CESTAT, Delhi, for admissibility of CENVAT credit on tower, shelters and civil foundation for telecom and passive infrastructure service provider.
We hope in this budget the government will come out with a positive clarification for the admissibility of the CENVAT credit.
Benefit given by Hon’ble Supreme Court in SRF Judgement – Not to be Diluted
In a recent pronouncement by the Hon’ble Supreme Court in M/s SRF Ltd. v. Commissioner of Custom, Chennai dated 26 March 2015, the exemption which was accorded to local manufacturer vide Notifications No. 6/2002 CE was also extended to the importers for the Countervailing Duty (CVD) being charged on the imports made into India. This resulted in a reduced levy of CVD on imports by approximately 5 %, making the importers get substantial wind fall gain.
The SRF Judgement resulted in a number of importers/companies claiming refund of CVD from the department. Additionally, it also led to a number of ramifications in terms of the tax management for the importers/companies. The direct consequence was on the profit and loss dynamics of such importer. Since the importers/companies started claiming the refunds of the CVD, the subject amount which had earlier stood as an expense in the P&L statement of the Importers/Companies, now became an asset in the books of the company, thereby inflating the income level of the companies.
For understanding the complete effect, we picked up the case of a ‘mobile handset importer’ Company which at present is being considered by the Department. The said Importer claimed the refund of the extra 5%/11.5% of the CVD as after the said Judgment CVD liability mitigated from 6%/12.5% to 1%.
Further, at time of filing the refund, Importer had to make some changes in their financials i.e. the expense of extra 5%/11.5% CVD which was paid by the Importer and therefore shown as an expense was shown as an asset under the head of current assets as CVD refund receivables. Consequently, the expense of the company reduced by the extra 5%/12.5% of CVD thereby resulting in an increase in the net profit of the company and ultimately leading to extra income tax to be paid by the Importer.
The major fear, which now lies, is that owing to the loss to exchequer being caused by the large amount of refunds, whether the government will nullify this judgement by way of a retrospective notification or amendment.
To provide ‘Digital India’ campaign it is important that the mobile industry is not plagued with excessive duties and any such amendment will go against the spirit of the current government initiatives.
Telecom Sector to be a part of ‘Digital India’
At present, no incentives are being offered to the starved telecom sector, which would have otherwise gone a long way in attracting further investment and contribution to the growth of the economy through the ‘Digital India’ campaign of the Government.
The major incentive for this sector would be reducing the rate of custom duty on the imports of telecom equipment or reduction in excise duty on mobile handsets as the same had been previously increased from 6% to 12.5% in the last budget.
Thus, expectation of the sector simply put is to provide certain other incentives so that affordable mobile handset/mobile access can be provided to the mass consumers.
As the telecom sector has now become the harbinger of technological growth, advancement and innovation, therefore, it becomes imperative for the government to give the sector due consideration and give greater incentives it in the upcoming budget.
Authored by Nimish Goel, Partner & Head, Indirect Tax and Nitesh Gupta, Deputy Manager, International Business Advisors. Nimish can be reached at firstname.lastname@example.org and Nitesh can be reached at email@example.com
International Business Advisors (www.ibadvisors.co) is a boutique audit, tax and consulting firm run by ex-BIG4 professionals and working extensively with multinational companies operating in varied sectors including e-commerce, mobile, manufacturing, real-estate and hospitality. IBA operate out of its offices in Delhi, Mumbai and Bangalore.