- CESTAT : 'Special Additional Duty' construable as customs-duty; Upholds interest-levy on short CVD payment
- HC : Managing investors' money under 'trust structure' by VCF not taxable: Reverses CESTAT-order
- Textile Ministry notifies extension of RoSCTL Scheme on export of Apparel/Garments till March 31, 2026
- HC: Directs MOF to consider request to exclude specialized Laser Marking Machines from ADD-levy; Disposes writ
- Himachal Pradesh HC declares ‘Water Cess’ levy on hydropower generation as ‘unconstitutional’
Government's U-turn on Input Tax Credit - A setback for Telecom Industry
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.
...This availment of credit would be divided into three instalments over three consecutive years. Further, the term plant and machinery was specifically defined to include telecommunication towers, indicating that the credit restriction in relation to construction of immovable property would not apply to the telecom sector (plant & machinery was specifically excluded from the restriction clause).
However, the final draft law which has been passed has taken a complete turn on the issue by disallowing credit on telecom towers. This has been done by adding an explanation to Section 17 of the CGST Bill (restricting credit on construction of immovable property, other than ‘plant and machinery), to define the term ‘plant and machinery’, whereby, the definition of ‘plant & machinery' specifically excludes Telecommunication towers. The amendment is clearly against the fundamental spirit of GST which provides for levying GST on value addition and avoiding cascading of taxes. While on one end, the definition of input / input services has been widened to cover all goods or services which are used or intended to be used in the course or furtherance of business, on the other hand, a very narrow view has been taken qua allowing credit with respect to inputs and input services in relation to construction of telecom towers, shelters and telecom infrastructure.
This amendment is clearly a step back considering the overall spirit with which GST is being introduced, as the tax will be a cascading cost in the chain, consequently making cellular services costlier for the final consumers.
Further, with respect to the spectrum rights that have been assigned, the CENVAT credit of the onetime charges paid can be availed over a period of three years. Thus, there could be a possibility that the entire CENVAT credit relating to such charges paid may not have been availed by a telecom prior to the date of introduction of GST.
...Currently, the Model GST law does not envisage any mechanism for transition or availing of the unavailed CENVAT credit of service tax paid on spectrum charges. This seems to be drafting lacuna and needs to be rectified.
In addition to the above, there are following other key points which if not resolved would pose tax cost as well as administrative issues:
1. The netting of payments earned by Indian International Long Distance Operator against payment made to Foreign International Long Distance Operator, are deemed to be received in convertible foreign exchange as per RBI regulations. However, the current service tax & GST provisions do not have any such clause. In terms of Place of Supply Rules, even if the customer is located outside India, the transaction may still become taxable as IGST if consideration is not considered as received in foreign exchange.
2. The telecom sector enjoys many exemptions on import of capital goods. The question is whether the exemptions qua CVD and SAD will continue in the GST regime. Considering that IGST will be charged as an Additional Duty of Customs u/s. 3(7) of the Customs Tariff Act, 1975, logically the exemptions should continue.
3. Certain players take advantage of the Export Promotion Capital Goods Scheme (‘EPCG Scheme’) in situations where Customs duty might be applicable. The exemption to IGST under EPCG scheme is unclear. This could pose a cash flow issue considering that the capex is usually of high value.
4. Considering that branches are considered as distinct persons under GST, there could be a cross charge amongst the branches. While credit would be available, this would again pose compliance challenges. It was expected that the said provision would be withdrawn qua services considering that in any event the credit of input services gets distributed through the Input Service Distributor mechanism and the respective destination State will get its share of revenue.
...5. Administrative issues and related system changes around multiple location registration, filing multiple returns and matching of credits on output vs. input is another major point of concern for the sector. In certain cases, if the Company does not have a place of business in any city, the credit on expenses where place of supply is performance based, would be a loss.
6. On a tax payment front, telecom sector receives adhoc payment from customers and many a times, these are excess payments. Considering these as advances and paying taxes will be another compliance hassle. Considering the sector is highly organised, dispensation is quite warranted.
The fundamental principle on which GST is based is avoiding issues around multiplicity of taxes and fungibility of credit. It is important that these issues are addressed at the outset so that the law is built upon a sound and robust foundation. In any other scenario, it would lead to an aggressive interpretation leading to litigation or a tax cost, both of which should be avoided. There is no dispute that all the expenses incurred and taxes paid are in the course or furtherance of business or commerce.