GST on telecom sector has raised several eyebrows since the introduction of GST in 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 e-commerce providers and easy access 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 cater 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, let us see how has the introduction of the GST has impacted the telecom sector?
In this article, we will cover 4 areas of concern companies are facing due to GST on the telecom sector and how they can mitigate them.
1. Centralized Registration versus State wise Registrations, leading to Increased GST Compliance for telecom sector
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 for telecom sector, companies are required to have individual GST registrations in every state they are present in. State-wise registrations has certainly lead to a substantial increase in GST compliance levels, given that most companies had a centralized registration under service tax. Effectively, a company which was filing only 2 returns on an annual basis as a service tax assessee, is now 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 for telecom sector, companies 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 helps 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, to determine GST for telecom sector, 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 need to update their customer database real-time. This has further complicated the 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:
- For fixed telecom/leased lines: The place of supply is where the cable/antenna is located
- For post-paid services: The place of supply is the billing address which is on record
- For pre-payment services: The place of supply is either the location of the agent or the address where pre-payment is received or voucher is sold
Based on these complications, there can be 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 need 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 of telecom sector
In the erstwhile 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 has certainly led 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 is available to telecom companies, thus increasing their tax burden.
4. Higher GST Rates vs Lower Service Tax Rates
In the GST regime, services attract 18% GST. This GST rate is 3% higher when compared to the erstwhile service tax rate of 15%. (Read here how GST Rates Could Impact Your Business Strategies). This has made 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 as a 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 another with a consideration’, telecom companies stand to face two challenges:
- Determining whether bundled deals are to be taxed as goods or services.
- Quantifying consideration for such bundled deals, as they are without consideration for the end-user.
Telecom players need to identify considerations in discussions with the device manufacturers. Similarly determining the taxability for value-added services (VAS) and determining their place of supply is another challenge to be addressed.
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 telecom companies define a crisp GST strategy to avoid future ITC losses.
In case you would like to know how IRIS GST can help you, please schedule a demo of IRIS GST Software or if you have any questions, please write to support@irisgst.com.
