Opinion: Announcements in Budget a Step in Right Direction for Telecom Industry

(Sanjay Kapadia is Partner at EY India)

The first full-year Union Budget, 2015 of the new government was presented by the finance minister, Arun Jaitley. The budget appears to lay down the vision of the new government in preparing a roadmap for rationalisation of taxes and improving the tax climate in the country.

While, there have not been any specific direct tax amendments proposed for the telecom industry, the following were the key announcements which would be of relevance to the sector:

- Reduction in the corporate tax rate from 30 per cent to 25 per cent over a period of next four years, accompanied by phased rationalisation/ reduction in the exemptions currently available to corporates.

- Abolishment of applicability of wealth tax provisions.

- Reduction in the withholding tax rate on payments in the nature of 'royalty' and 'fees for technical services' from 25 per cent to 10 per cent; this would help in reducing the tax costs for telecom companies in case of tax protected contracts and also help in sourcing foreign technology at reduced costs.

- Increase in the dividend distribution tax and buy back tax on account of increase in the surcharge rates; and

- Deferment of applicability of the GAAR provisions by 2 years.

However, it is an opportunity missed to provide clarity on the current issues faced by the telecom industry including clarity on applicability of withholding tax provisions on standard telecom payments, discount on prepaid cards, etc.

From an indirect tax standpoint, following key pronouncements have been proposed:

- In relation to service tax, the biggest change to impact service providers is the increase in the service tax rate. The effective rate is increased to 14 per cent and an incremental Swachh Bharat cess of 2 per cent to be levied on services, has been introduced. This implies that service tax rate can increase by 30 per cent - which is a fairly significant change. Further, the implications of applying tax on all services provided by Government to business entities needs to be analysed in the context of rights and license fee arrangements;

- From a customs stand point, the median rate of customs duty has been increased from 28.85 per cent to 29.44 per cent. Customs duty has been exempted on specified items covered under the Information Technology Agreement.

- Excise duty has also undergone a marginal increase in rate from existing 12.36 per cent to 12.5 per cent. Excise duty on mobile handsets including cellular phone is being changed to 1 per cent without credit or 12.5 per cent with credit.

- From a cenvat view point, the increase in the duration of time-limit for availing credits from 6 months to 1 year is a welcome change. This should provide the industry, a much required flexibility, to ensure that there are no credit leakages on account of timelines. Provision for credit eligibility on partial service tax payments has also been rationalized.

- Penalty provisions across indirect tax legislations have been made more stringent for evasion cases. Multiple options have been provided to foreclose matters in dispute by payment of reduced penalties - again, a good proposition to help taxpayers reduce litigation.

- On the compliance front, key proposals for quick registration process and digital maintenance of electronic records by assessees reflect the Government's commitment to provide ease of doing business in India; and

- In addition, the Finance Minister has re-emphasized the Government's intention to implement a nationwide GST by 1 April 2016.

Overall, the announcements proposed in the Budget are a step in the right direction, the hopes of 'Ache Din' for the telecom sector will have to wait for now.

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