India is currently the world’s second-largest telecommunications market with a subscriber base of 1.20 billion and has registered strong growth in the past decade and half. The Indian mobile economy is growing rapidly and will contribute substantially to India’s Gross Domestic Product (GDP)
The liberal and reformist policies of the Government of India have been instrumental along with strong consumer demand in the rapid growth in the Indian telecom sector. The government has enabled easy market access to telecom equipment and a fair and proactive regulatory framework that has ensured availability of telecom services to consumer at affordable prices.
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Major Fiscal Incentives for Telecommunication Industry
Various fiscal incentives are provided by the Government of India for promoting investment in the Telecommunication sector. Some of the key incentives are outlined below:
Expenditure for obtaining licence to operate telecommunication services.
35ABB. (1) In respect of any expenditure, being in the nature of capital expenditure, incurred for acquiring any right to operate telecommunication services either before the commencement of the business to operate telecommunication services or thereafter at any time during any previous year and for which payment has actually been made to obtain a licence, there shall, subject to and in accordance with the provisions of this section, be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure.
Explanation.—For the purposes of this section,—
(i)”relevant previous years” means,—
(A) in a case where the licence fee is actually paid before the commencement of the business to operate telecommunication services, the previous years beginning with the previous year in which such business commenced;
(B) in any other case, the previous years beginning with the previous year in which the licence fee is actually paid,
and the subsequent previous year or years during which the licence, for which the fee is paid, shall be in force;
(ii) “appropriate fraction” means the fraction the numerator of which is one and the denominator of which is the total number of the relevant previous years;
(iii) “payment has actually been made” means the actual payment of expenditure irrespective of the previous year in which the liability for the expenditure was incurred according to the method of accounting regularly employed by the assessee.
(2) Where the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are less than the expenditure incurred remaining unallowed, a deduction equal to such expenditure remaining unallowed, as reduced by the proceeds of the transfer, shall be allowed in respect of the previous year in which the licence is transferred.
(3) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) exceed the amount of the expenditure incurred remaining unallowed, so much of the excess as does not exceed the difference between the expenditure incurred to obtain the licence and the amount of such expenditure remaining unallowed shall be chargeable to income-tax as profits and gains of the business in the previous year in which the licence has been transferred.
Explanation.—Where the licence is transferred in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year.
(4) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are not less than the amount of expenditure incurred remaining unallowed, no deduction for such expenditure shall be allowed under sub-section (1) in respect of the previous year in which the licence is transferred or in respect of any subsequent previous year or years.
(5) Where a part of the licence is transferred in a previous year and sub-section (3) does not apply, the deduction to be allowed under sub-section (1) for expenditure incurred remaining unallowed shall be arrived at by—
(a) subtracting the proceeds of transfer (so far as they consist of capital sums) from the expenditure remaining unallowed; and
(b) dividing the remainder by the number of relevant previous years which have not expired at the beginning of the previous year during which the licence is transferred.
(6) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers the licence to the amalgamated company (being an Indian company),—
(i) the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the amalgamating company; and
(ii) the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not transferred the licence.
(7) Where, in a scheme of demerger, the demerged company sells or otherwise transfers the licence to the resulting company (being an Indian company),—
(i) the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the demerged company; and
(ii) the provisions of this section shall, as far as may be, apply to the resulting company as they would have applied to the demerged company if the latter had not transferred the licence.
(8) Where a deduction for any previous year under sub-section (1) is claimed and allowed in respect of any expenditure referred to in that sub-section, no deduction shall be allowed under sub-section (1) of section 32 for the same previous year or any subsequent previous year.
M-SIPS, lower tax rate boost for telecom sectors
companies that have approvals under the M-SIPS scheme and start operations between October 1 this year and March 2023 can avail of the 15% tax rate for new manufacturing companies as well as benefits under the capital subsidy scheme. M-SIPS is the Modified Special Incentive Package Scheme, aimed at encouraging electronics manufacturing.
“Any new company into manufacturing set up during the relevant period will be eligible,” said a senior government official. “It cannot avail of any other incentive or holiday under the income tax, but incentives under other schemes can be availed.”
The corporate tax rate for new manufacturing companies to 15% from 25% to spur investment, revive growth and boost job creation.
The benefits of low tax rates and MSIPs will make it doubly attractive for companies that have approvals and are yet to start operations. There had been confusion about whether both these benefits could be availed of by such firms. Industry and the ministry of electronics and IT had sought clarity on the matter. The official said benefits under other schemes can be availed of under the 15% corporate tax rate framework.
M-SIPS provided multiple incentives for 10 years, including a capital subsidy of 20% in special economic zones (SEZs) and 25% in non-SEZs for units engaged in various kinds of electronics manufacturing, besides reimbursements of countervailing duty or excise on capital equipment for the non-SEZ units. For some high-capital investment projects, it also provided reimbursement of central taxes and duties.
GST on Telecom Services
Telecommunication services was attracted service tax of 14% along with Swachh Bharat Cess (SBC) of 0.5% and Krishi Kalyan Cess (KKC) of 0.5%. While service tax was a pure value added tax, the above mentioned cesses are not. This is for the reason that while no ITC (input tax credit) of SBC was available, the ITC of KKC was allowed to be set off only against KKC. Therefore, both the cesses are turnover tax.
As against the above, the telecommunication services now attract GST of 18% in the GST regime, which is a pure value added tax because full ITC of inputs and input services used in the course or furtherance of business by the telecommunication service provider would be available.
Moreover, presently telecom service providers are neither eligible for credit of VAT paid on goods nor of special additional duty (SAD) paid on imported goods/equipment. However, under GST, telecom service providers would avail credit of IGST paid on domestically procured goods as also imported goods. As per some estimates, this additional input tax credit would be as much as 2% of the turnover of the telecom industry. Further, ITC of service tax paid on assignment of spectrum by the Government in 2016 is presently allowed to be availed of by the telcos over a period of 3 years. In the GST regime, the entire credit can be taken in the same year. Resultantly, the balance two-thirds credit of the previous year would be admissible in the current financial year itself. All of these would reduce the telcos liability to pay GST through cash to about 87% of what they paid in the last fiscal.
Thus, the telcos are required to re-work their costing and credits availability and re-jig their prices and ensure that the increased availability of credits is passed on to the customers by lowering their costs.