Telecom sector seeks duty relaxation on network devices

Right of Way (RoW) rules were brought in to ease setting up telecom infrastructure by standardising processes and fixing applicable charges. Telecom companies pay a fixed tariff to agencies like municipal corporations for permission to build towers and lay the optical fibre on public land. These agencies do not pay taxes on these charges, as that would amount to taxation of land and buildings, on which they have exclusive taxation powers. 

The income of states cannot be subject to union taxes. Central government investigations against such agencies, to recover such taxes, are making these agencies pressurise telecom companies into paying the due tax with interest and penalty. This adds to the financial woes of the industry and leads to unnecessary, financially draining litigation. 

We have recommended that the Centre clarify that provisions of RoW are in relation to discharge of functions specified in XI/XII Schedule of the Constitution, and hence covered under the relevant exemption in favour of government departments and hence there is no liability of service tax/ GST on such transactions.

Telecom companies transfer prepaid vouchers and SIM cards (representing ‘the right to receive prepaid services’), to independent distributors at a discount, who further sell it to retailers or subscribers. Distributors are not agents of telcos. 

So discount does not qualify as commission as under section 194H of the Act. No payment/ credit towards the discount allowed to the distributors is made by the telecom companies. So, discount extended to the pre-paid distributors is not subject to tax withholding. But, authorities have adopted a contrary position, and the matter is presently pending adjudication before the Supreme Court. 

Given the quantum involved, this issue should be addressed by rationalising the tax rate or necessary clarification. As this is a matter that needs immediate attention, we have recommended that the authorities understand that the discount extended to pre-paid distributors is not commission. 

However, to bring the ongoing litigation to an end, given the low margins earned by the distributors, a lower withholding tax rate of 1% may be prescribed for telecom distributors. 

Customs duty exemption for LTE equipment for 4G network: 

The next stage of evolution is dependent on high speed Broadband powered by 4G technology. It is further needed for the success of programmes like ‘Digital India’, Smart Cities’ etc. Penetration of telecom network till now was aided by customs duty exemptions given to 2G and 4G network equipment, which helped in reducing cost for the consumers. 

Unfortunately, the Government has withdrawn customs duty exemptions on telecom equipment towards promoting local telecom equipment manufacturing. But, the scale and quality of equipment needed by the sector is not yet available in the country and the telecom firms have to pay the higher price to import the equipment. 

This sector is the biggest supporter of indigenous manufacturing, however, till such time, as quality products at a competitive price are available in the country, at the scale that they are needed; the government needs to rethink its stand regarding customs duty on equipment, to ensure timely roll-out of networks.