Government's U-turn on Input Tax Credit - A setback for Telecom Industry

April 17,2017
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Ritesh Kanodia, Partner, Dhruva Advisors LLP
Nikki Poddar, Senior Associate

The GST bills (except SGST Bill which needs to be passed by the respective State Legislative Assemblies) have received assent from both the houses of the Parliament as well as the Presidential nod, paving the way for the introduction of GST in India. Clearly, this is a landmark in the history of Indian Indirect taxation scenario, whereby, a common legislative code replaces multiple applicable indirect tax laws.

While on an overall basis, GST is very positive for the Indian economy, it also creates certain fundamental concerns for the telecom sector.

In the current indirect tax regime, the telcos are locked in a litigation battle with the tax authorities regarding eligibility to claim CENVAT credit of materials & services used for construction of towers, shelters etc. Various tribunals and High Courts have held that since erection/ fabrication of towers gives rise to immovable property, credit on the same cannot be availed as either inputs or capital goods. Further, it has been held this is not directly used for output services i.e. telecommunication services whereas certain Tribunals have held that the same is used for providing output services and thus is eligible.

The matter for eligibility of credit on towers for assessee providing telecommunication services is currently pending before the Hon’ble Supreme Court.

However, the industry was, not unjustifiably, expecting that the issue would be specifically addressed under the GST regime.

In June 2016, the Government released the first Model GST law, wherein a specific restriction had been provided for input tax credit of goods and services used for construction of immovable property, except for plant and machinery. The term 'plant and machinery', however, was not defined, which raised ambiguity over whether the credit in relation to telecom towers would be allowed. Thereafter, in the revised Model GST law released in November 2016, the Government provided some much-needed respite to the industry by explicitly allowing credit on telecom towers fixed to the earth by foundation or structural support.

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