Budget 2016: COAI Welcomes the Move to Clarify Spectrum Trading as a Service

COAI commends the Hon’ble Union Minister of Finance Arun Jaitley, on having presented a pretty balanced budget, and especially congratulates him for making a superlative effort to maintain the fiscal deficit target of 3.5% which is reflective of the Government’s intent to maintain fiscal discipline.

“While specific details of the Budget proposals are yet to emerge, we are happy observe that the Budget gives an impetus to ‘Make in India’ by pushing IT hardware and capital goods amongst other industries. COAI would also like to welcome the move to clarify Spectrum Trading as a service. As such, Spectrum Trading Tax being categorised as Service Tax allows telecom companies to claim CENVAT credit.” Explained, Rajan S. Mathews, Director General, COAI.

Furthermore, the opening of 11 new Customs, Excise and Service Tax Appellate Tribunal (CESTAT) benches is also a much-needed welcome initiative to resolve over 1.3 lakh tax dispute cases pending in various courts.

Some of the key changes from Indirect tax perspective have been highlighted below:

1. The decision to abolish 13 different cesses under different ministries is a positive step, although the proposed Krishi Kalyan cess of 0.5% levied on all taxable services with effect from June 1 (after enactment of the Finance Bill, 2016) could impact the prepaid business of the operators. Enabling provisions for availment of CENVAT credit of the said cess are also yet to be introduced
2. Exemption from Basic Customs duty has also been withdrawn on specified telecommunication equipment [such as soft switches and Voice over Internet Protocol (VoIP) equipment namely VoIP phones, media gateways, gateway controllers and session border controllers, Optical Transport equipment; etc.].
3. Assignment by the Government of the right to use the radio-frequency spectrum and subsequent transfers has been included under the definition of ‘declared service’. Thus, assignment by Government of the right to use the spectrum as well as subsequent transfers of assignment of such right to use would now be construed as ‘service’ and liable to Service tax. Such liability will not only increase cost of service but will also result is huge cash flow issue for the operators.

4. It has also been proposed that CENVAT credit of Service tax paid on amount charged for assignment by Government or any other person of a natural resource (such as radio-frequency spectrum, mines etc.) shall be spread over the period of time for which the rights have been assigned. Deferring utilization of input credit of Service tax would result in blockage of funds and would have a huge cash flow impact on the operators.

6. Interest rates on delayed payment of duty/tax across all indirect taxes is made uniform at 15%, except in case of service tax collected but not deposited with the Central Government, in which case the rate of interest will be 24% from the date on which the service tax payment became due.

II. On issues pertaining to Direct tax

1. POEM to be applicable from 1 April 2016 (AY 2017-18): Mechanism to comply with the provisions of the Act (i.e. computation of income, treatment of unabsorbed depreciation, set off and carry forward of losses etc.) for the foreign companies who becomes resident of India by virtue of POEM shall be prescribed. This is a relief for India based telecom companies with global operations.

2. PAN not required for foreign companies: Provisions of section 206AA of the Act shall not apply to non-resident companies with effect from 1 June 2016, subject to the conditions to be prescribed. This may bring much needed relief to the Indian telecom operators while dealing with the non-resident telecom companies not having PAN in India.

3. Amortization of spectrum fees under section 35ABA: Spectrum payments should now be amortized over the period for which the spectrum remains in force. However, this provision has a prospective effect. So ambiguity remains on the fate of those spectrum payments which have been capitalized in the books of telecom companies as intangible assets depreciable over 4-5 years.

4. Lower tax rate for domestic companies engaged in manufacturing: Option of availing lower rate of income tax of 25 percent by newly set up domestic companies engaged in manufacturing has been provided. These companies have to forego incentives (accelerated depreciation, investment allowance, expenditure of scientific research etc). This option shall provide some relief to the telecom hardware industry.

5. Lower rate of taxation for income from Patents: In order to increase indigenous research and development, a lower rate of taxation at the rate of 10 percent is prescribed for taxation of royalty income arising on account of patents developed and registered in India.

6. Alternate Dispute Resolution: High Level Committee chaired by Revenue Secretary and member CBDT to oversee fresh cases where assessing officer applies the retrospective amendment (specifically relating to indirect transfers). This is a one-time scheme of Dispute Resolution for ongoing cases under retrospective amendment provided the tax payer foregoes its right to appeal on the disputed matter. This will help the companies to resolve the long standing tax disputes and increase the credibility of the India as an investment destination for foreign players.