Impacts & Opinions

GST – Impact on the Telecommunications Sector


  • The Telecom sector, with its mammoth outreach to more than a billion subscribers cutting across State boundaries, is one of the India’s core economic drivers
  • India is only second to China in terms of the number of connections and subscribers.
  • The sector is also among the top five employment generators in India.
  • Telecom sector of India can basically be divided into three parts, the telecom service providers, infrastructure providers and equipment manufacturers.

Comparison between Utilization of various taxes

Current  taxes Utilization of  credit taxes Under GST Utilization of  credit tax
Service tax Available Available
Excise duty ( Capital goods and Input credit) Available Available
Value added tax (VAT) Not available Available
Central  sale tax Not available Available
Entry tax Not available Available
Special additional Not available Available

Benefits and Drawbacks of GST Implementation on Telecommunication Sector:

Rate of tax:

  • Currently the rate service tax including cesses is 15%,however if GST rates are estimated above the same it would have a direct impact on the increase in the cost for the subscribers.
  • Telecom companies may find difficult to pass increased burden of taxes to end customers belong in prepaid segment

Change in the system of taxation:

  • Currently, selling of recharge vouchers to agents/distributors is exempt from service tax as per Mega exemption notification no.25/2012 dated 20 June 2012.
  • As the GST law currently reads, in the absence of MRP-based valuation for the telecom and specific exemption to the distributors, it appears that each leg of the sale of SIMs would be subject to GST.
  • This would mean that the distributors and all retailers in the supply chain would get taxed.

Compliance requirements:

  • Currently, most telecom have obtained organization Service tax registration certificate and undertake organization compliances. However, under the GST Law, separate registration would be required in each State from where the services are rendered.
  • Accordingly, telecom could be required to obtain registration separately in each State from where the services are rendered leading to increased compliance requirements as compared to the current regime.
  • Mandatory annual audit compliance: Under the GST regime, VAT audit procedures may get adopted. With the merger of both goods and services under one authority, mandatory audit provisions may apply to both goods and service providers alike. As a result, telecom operators may need to engage with at least two entities, one for compliance and another for audit, failing which a possibility of conflict of interest may arise. Such dual engagement with tax firms and management services providers will further lead to an adverse hike in compliance cost

Unveiled cenvat credit relating to one time charges for spectrum assignment:

  • Presently, cenvat credit for service tax paid on one time charges for assignment of right to use any natural resources is spread equally over a period of three years as per the CCR, 2004,
  • The GST law does not envisages any mechanism for carry forward of such unveiled credit.

No provision for transition of input tax credit relating to goods purchased:

  • Under the current regime, telecom are not eligible to avail credit of the tax (VAT/ CST) paid on purchase of goods. However, under the GST regime, telecom would be allowed to avail such input tax credit for organization against output GST liability.
  • Currently, there is no specific transition provision under the GST law which permits a telecom to carry forward such taxes paid under the present regime for organization against GST liability.

Cenvat credit on towers :

  • Infrastructure providers also known as tower companies are one of the three broad segments of the telecom sector.
  • In this regard, it is relevant to refer to BHARTI AIRTEL LTD V/S COMMISSIONER OF CENTRAL EXCISE, PUNE wherein credit on the towers, its parts thereof and pre-fabricated building material used for providing telecommunication service, was denied on the grounds that the goods under consideration would neither qualify under the definition of ‘Capital goods’ nor input defined under cenvat credit rules, 2004 accordingly due to the factor of immovability in the goods there is a ambiguity with respect to availing such credit.
  • Under GST, it would be interesting to understand whether such ambiguity would continue or if there would be some certainty with no restrictions on availing credit.

Eligibility to claim credit for passive Infrastructure

  • As per GST law, input tax credit shall not be available in respect of goods/services acquired in the execution of works contract where such works contract results in construction of immovable property, other than P&M.
  • Currently telcos have been taking the credit of inputs and CG’s other than which are in the nature of immovable goods and are non-marketable and non -excisable as per Rule 2(k) of CCR,2004.

Petroleum products kept out of GST:

Telecom towers run on diesel i.e. DG sets, electricity and lithium cell batteries. If the petroleum products continue to remain out of GST, it will lead to increase in the overall tax cost and become an additional burden for the telcom.

ISD Mechanism to be extended for goods as well:

  • Telcos incur huge costs such as advertising, R&D, legal expenses that are borne by H.O. Under service tax, input tax credit availed for the same is then distributed using ISD mechanism to different states.
  • But under the GST regime, ISD mechanism should be extended not only for input services but also for inputs and capital goods used for provision of telecom services.

Spectrum License Fee

  • Currently Input tax credit of service tax paid on assignment of spectrum by the Govt. in 2016 can be availed by the telecom over a period of three years.
  • Under the GST regime, the entire credit can be taken in the same year.
  • Resultantly, the balance two-third credit of the pervious year would be admissible in the current financial year itself.
  • All of these would reduce the telecom companies liability to pay GST through cash to about 87% of what they paid in the last year.

Ambiguity over Place of Supply as per GST law :

  • As per GST Law,
  • The place of supply of telecommunication services including data transfer, broadcasting, cable and direct to home television services to any person shall—
  • (a) in case of services by way of fixed telecommunication line, leased circuits, internet leased circuit, cable or dish antenna, be the location where the telecommunication line, leased circuit or cable connection or dish antenna is installed for receipt of services;
  • Ambiguity: Whether POS should be the place where lease line installation is initiated or terminated.
  • In case of mobile connection for telecommunication and internet services provided on post-paid basis, be the location of billing address of the recipient of services on record of the supplier of services;
  • No ambiguity as such
  • In cases where mobile connection for telecommunication and internet service are provided on pre-payment through a voucher or any other means, be the location where such pre-payment is received or such vouchers are sold:
  • provided that if such pre-paid service is availed or the recharge is made through internet banking or other electronic mode of payment, the location of the recipient of services on record of the supplier of services shall be the place of supply of such service.
  • Ambiguity: What will be the POS if vouchers are sold or recharge is done in state of Rajasthan for a prepaid subscriber registered in the state of Maharashtra.
  • Valuation/pricing issues in case of stock transfer:
  • In case of supplies from one state registration to another state registration of the same legal entity will lead to litigation in the valuation of such supplies for capturing IGST.
  • It will be all the more difficult in cases where TRAI circle are not aligned with the states. For instance self supply within the same circle is not presently liable to ST. However if the same self supply within the same circle covers two states, determination of valuation and taxation will be fraught with complexity.

Key Points:

  • Call charges, Data rates may go up if the tax rate in the GST regime exceeds 15 %.
  • The entire telecom companies may need to be revamped to accommodate a state level, GST driven mechanism and processes.
  • Removal of Cascading Effect.
  • Compliance cost will increase.
  • Changes agreement with various suppliers, customers, Etc.
  • Tower firms won’t be able to set off their input duty
  • liabilities because petro-product continuous to stay
  • outside GST framework.