Do Telecom Companies have the Bandwidth for GST?

Do Telecom Companies have the Bandwidth for GST?

by CA Pritam Mahure | April 8, 2017

In the last few decades, the telecom sector has emerged as one of the largest services sectors in India. With the internet of things becoming more common, data charges reducing considerably, mushrooming of ecommerce providers and easy accessibility to technology, this is one sector that has achieved huge penetration in the retail space.

However, telecom is different from other service industries due to the fact that there is still a relatively small pool of service providers that caters to the majority of the market, and the market seems to be in further consolidation mode. On the customer side, there is a fair amount of churn and telecom companies are constantly focused on customer retention by offering free promotional offers and value added services. Given this backdrop, how will the introduction of the Goods and Services Tax impact this sector and are companies ready for this change?

In this article, we will cover 4 areas of concern that telecom companies will face in transitioning to GST and what they can do to mitigate them.

1. Centralized Registration versus State wise Registrations, leading to Increased Compliance:

Most telecom companies in the country have a multi-state presence. To complicate matters further, telecom companies operate their service in geo-mapped circles which are not always mapped 1:1 with states. Practically, this means that you could have one service circle mapped to multiple states such as Maharashtra and Goa and/or two cities in the same state belonging to different circles such as the Mumbai circle.

In the GST regime, telecom companies will be required to have individual registrations in every state they are present in. State-wise registrations will certainly lead to a substantial increase in compliance levels, given that most companies currently have a centralized registration under service tax. Effectively, a company which may be filing only 2 returns on an annual basis as a service tax assessee, will now be required to file as many as 61 returns per year for every state they are present in (five returns per month plus one annual return).

2. Fixed ‘Place of Service’ vs Movable ‘Place of Supply’

With the onus of determining the place of supply falling on the assessee in the GST regime, telecom companies will have to put in place stringent mechanisms to determine if a transaction is ‘intra-state’ or ‘inter-state’. As a service provider, correct determination of place of supply will help you decide whether tax payment is against Central GST (CGST) plus State GST (SGST) or Integrated GST (IGST),for intra and inter-state transactions respectively.

Additionally, telecom companies face an added complication due to the mobile (no pun intended) nature of their customers. Typically, the place of supply or consumption for telecom services is the location of the recipient of services on the records of the supplier. But the average telecom customer keeps moving from one state to another for jobs, studies etc. without changing their service provider or even intimating them of the location change. Hence, telecom companies will have to update their customer database real-time. This will further complicate core operations of telecom companies.

And even if companies tighten their processes for place of supply determination, there is plenty that can go wrong owing to the separate provisions in the GST Law for various telecom services:

  1. For fixed telecom/leased lines: The place of supply will be where the cable/antenna is located
  2. For post-paid services: The place of supply will be the billing address which is on record
  3. For pre-payment services: The place of supply will be either the location of the agent or the address where pre-payment is received or voucher is sold

Based on these complications, we foresee several legal disputes that telecom companies could get into over the place of supply of services. Currently, the GST legislation provides that if an assessee wrongly pays, say CGST and SGST instead of IGST(on a belief that the transaction is intra-state), then they will have to pay the correct taxes (i.e. IGST) again and then claim refund for the wrongfully paid taxes.

Ideally, instead of putting the onus on the taxpayer to determine whether the transaction is intra-state or inter-state, the GST law should provide for a simpler redressal mechanism.

3. Input Tax Credit Woes on Immovable Property:

In the current indirect tax regime, Central Value Added Tax (CENVAT) credit on telecommunication towers was being denied (based on certain judicial precedents) to telecom companies.Now, in the GST Bill there is a specific provision introduced to deny the input tax credit on telecom towers. This denial of credit on telecom towers/ infrastructure will certainly lead to cascading tax for this sector.

To add to their woes, certain petroleum products such as diesel, a key cost in keeping telecom towers functioning, are outside the purview of GST. This means that no input tax credit of taxes paid on diesel will be available to telecom companies, thus increasing their tax burden.

4. Higher GST Rates vs Lower Service Tax Rates:

In the GST regime, services are expected to attract 18% GST. This rate is 3% higher when compared to the current service tax rate of 15%. (Read here how GST Rates Could Impact Your Business Strategies).This may make telecom services such as broadband connections and calling services a bit costlier, particularly for retail customers. Even though, there are few players in the market, there is stiff competition for market share due to the ever-reducing prices of data and voice technologies. Due to these crunched margins, any increase in pricing might directly impact the customer’s pocket.

5. Goods or Services?

Another highlight is that these days telecom companies collaborate with mobile manufacturers to provide bundled services to customers such asa one year free subscription with the device. While the customer is not charged separately, the telecom operator enters into an agreement with the device manufacturer on a profit-sharing basis. Since GST is applicable on ‘goods and services transferred from one place to other with a consideration’, telecom companies stand to face two challenges:

  1. Determining whether bundled deals areto be taxed as goods or services.
  2. Quantifying consideration for such bundled deals, as they are without consideration for the end-user.

Telecom players will need to identify consideration in discussions with the device manufacturers. Similarly determining the taxability for value added services (VAS) and determining their place of supply could be challenging.

Way forward

Telecom services have seen huge penetration in the country in recent times. So any margin pressure faced by these firms due to GST has the potential to impact their pricing and in turn millions of customers. It is therefore crucial that the GST Council provide more clarity to this sector and address any open issues.

IRIS has been in the financial compliance space for over 2 decades having worked with regulators and filing entities alike. In India, we have supported MCA filings for over 700 entities including companies of groups such as Tata, Reliance, TVS, Godrej, L&T etc.  We are now combining our deep domain capabilities with our strong technology backbone to bring you IRIS GST, an end to end GST filing solution.

In case you would like to know how IRIS GST can help you, or if you have any questions, please write to pritam@irisgst.com.

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