Due to variance in regulatory requirements and GST provisions, undertaking compliance and reconciliation would be a massive and complex task for telcos

Touted as India’s most transformative tax reform in decades, the goods and services Tax (GST) has the potential to add as many as 2 percentage points to the GDP, while also improving the ease of doing business. When implemented, GST is expected to usher in a harmonised national market of goods and services, and lead to a simplified, assessee-friendly tax administration system. However, there are sector-specific issues arising from aspects of the model GST law that are required to be addressed by the government before the introduction of the final law.

Telecom is one of the most basic and critical infrastructure services and has a massive outreach to more than a billion subscribers across geographical boundaries. Telecom faces several issues under the current indirect tax regime and, therefore, the sector has high hopes from the proposed GST regime. However, the model GST law does not appear to bring an end to the issues being faced by the telecom sector.

Exclusion of petroleum products: Another major impact on the telecom sector is on account of deferment of applicability of GST on petroleum products. The telecom sector has to maintain round the clock uninterrupted supply of services, which necessitates the use of power generators. Given that the applicability of GST on petroleum products has been deferred, the same would continue to attract central excise duties and states sale taxes. This would result in massive cascading impact on the telecom sector.

Non-alignment of circles with states: The telecom sector is regulated by the Telecom Regulatory Authority of India (Trai) and various licences required to provide telecom services are granted by the Department of Telecommunications (DoT). Telcos are required to obtain circle-wise licences from DoT for providing some telecom services such as mobile telephony. Whereas for services like national long distance (NLD) services and international long distance (ILD) services, licences are obtained on a pan-India basis. Circle-wise licences are not aligned with the geographical boundaries of states and one circle may cover multiple states. For instance, the Delhi NCR circle covers the local areas served by Delhi, Ghaziabad, Faridabad, Noida and Gurgaon telephone exchanges, i.e., covers Delhi and parts of Haryana and Uttar Pradesh. Currently, telcos maintain circle-wise accounting to account for circle-wise revenue for payment of licence fee. Whereas, under the GST regime, the accounting would be required to be maintained state-wise.

Further, there exist various disparities between telecom regulations (governed by Trai) and GST provisions. For instance, in case of roaming recharges for prepaid mobile telecommunication services, subscriber of one circle (i.e. home circle) buys recharge in the roaming circle. As per place of supply provisions under the model GST law, the place of supply would be the roaming circle. Whereas as per the regulatory requirement, such charges are required to be accounted in the home circle. Also, as mentioned earlier, certain circles comprise of multiple states (like Delhi NCR) and also certain cities of the same state fall under different circles (like Mumbai and Maharashtra and Goa). In such scenarios, certain intra-circle supplies as per regulatory requirement would be considered as inter-state supplies under GST and vice-versa. These disparities between telecom regulations and GST provisions would lead to complexities in accounting and these complexities would further increase if GST rates across states vary.

Self-supplies such as intra-circle termination and intra-circle roaming services for the same operator, especially in case of multi-state circles, may become taxable under GST. Currently, telcos do not have any mechanism to track intra-circle termination and roaming supplies. Thus, this would also increase complexities for telcos under the GST regime, including the valuation of such self-supplies.

So, due to variance in regulatory requirements and GST provisions including non-alignment of circle areas, undertaking compliance and reconciliation would be massive and complex task for telcos.

The above mentioned issues and complexities would necessitate telcos to make massive technological changes in the IT and accounting systems to maintain state-wise accounting.

The model GST law provided a specific place of supply for telecom services; however, the same entails various complexities.

In case of B2B supplies of leased circuit services (NPLC, IPLC, etc) and fixed line services (being the place where the leased circuit/telecommunication line is installed), it would be difficult to apportion the value of such services where lump-sum consideration is charged for multiple state locations.

For prepayment services where payment is made through recharge vouchers or e-top ups (other than e-payment), place of supply is the location where prepayment is received or recharge vouchers are sold. Prepaid vouchers, etc, are sold by telcos through a distribution channel consisting of a large number of distributors and retailers. Given the distribution chain involved in the sale of recharge vouchers, the location where prepayment is received for recharge vouchers could be different from the location where such recharge voucher is sold. For instance, the telco received R45 as a consideration (prepayment) at its head office in Delhi for a voucher having MRP R50 from a distributor located in Noida. In this case, it is not clear how to determine the place of supply as prepayment is received in Delhi, but the voucher is sold to a distributor in Noida. Accordingly, this could result in ambiguity with regard to value of supply and tax liability for the distribution chain.

In view of the above complexities in determination of place of supply of telecom services, it is recommended that the place of supply should be aligned to the general rule, i.e., the address of the service recipient as per records of the service provider. Having said that, the place of supply being the service recipient’s address would burden telcos to keeping their database updated on a real-time basis.

These issues for the telecom sector should be taken into consideration by the government while finalising the GST law, to ensure that the same are adequately addressed.

The author is tax partner, Telecom Practice, EY. Views are personal