Bring clarity in taxes, reduce litigation

Winston Churchill had said: "Success is the ability to go from one failure to another with no loss of enthusiasm". Nebulous, but not wholly untrue, when spoken in the context of the Indian telecom sector. India's telecoms industry in 2016 is embracing strategic, forward-looking business models that are critical for its survival and success.

Despite suffering multiple regulatory setbacks and crushing financial strain over the past few years, the sector's enthusiasm and dynamism continues with remarkable ease. With spectrum trading guidelines notified by the regulator, Indian telecom sector is likely to witness consolidation and rationalisation, and provide customers access to better quality network services from operators currently dealing with congested networks.

However, as we step into 2016, the sector continues to struggle with its share of challenges that are bound to impede the growth story, particularly with telecoms' balance sheets under significant pressure due to top dollars paid to the government for snatching the spectrum required to roll out high-speed coverage across the country.

There are several existing tax provisions exerting additional burden on the industry that need an urgent revamp. To foster the creation of a robust tax environment, urgent measures need to be adopted on several fronts. With Union Budget on the anvil, the industry hopes for constructive reforms on some of the impending issues.

The 2016 tax wish list for telecom sector hopes for clarity on select issues and reduction in their ever increasing tax litigation bills. Fierce bidding to acquire the prized spectrum has proved to be a huge cost for telecoms. A clarification from the government that this spectrum is an intangible asset eligible for tax depreciation is much needed to bring certainty for the sector.

While the spectrum trading and sharing norms have spurred a wave of consolidation in the sector, the industry expects some clarification on characterisation on payments made for trading/sharing and non-applicability of withholding tax on these payments. It is also critical for the industry to obtain clarity from the government on whether consideration for spectrum trading would be liable to Service tax or VAT or both.

Telecoms do not consider distributors' margins on sale of SIM cards and prepaid vouchers to be in the nature of 'commission', liable to withholding tax at 10 per cent. The industry continues to face significant litigation on this issue and has been expecting the government to bring clarity on this issue for very long. Rationalising withholding tax rate on 'commission' may reduce the cost burden for telecoms, given that most distributors of telecom services in India operate in an unorganised sector, resulting in tax withholding to be a cost.

Requirement of PAN for non-resident payments to avoid tax withholding at higher rate is also an added burden, particularly given the volume of payments made by Indian telecoms and the fact that most contracts with foreign telecoms require withholding tax burden to be borne by the Indian telecoms. Removal of the requirement for non-residents to furnish their PAN and instead permitting the non-residents to furnish their Tax Identification Number in their country of residence to avoid applicability of withholding tax at a higher rate, would also be a welcome step.

Clarification from the government on the definition of 'royalty' to exclude telephony and internet bandwidth, shall avoid increase in cost of telecom services for Indian telecom operators.

With this we hope that the Union Budget 2016 unlocks the doors for a new tax era in telecoms. This is and should be the 'call' of the hour. Especially, as India takes successful strides into its 68th year as a Republic - and one that is full of a million aspirations and multitude of communications and connectivity needs. Undoubtedly, tax and regulatory certainty is the bedrock of those aspirations and key for a financially confident and tax prudent telecom sector.
 
(The author is Tax Partner, EY India. Views expressed are personal.)