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The GST will not be kind to telecom companies at all

telecom (1)

The Goods and Services Tax Constitutional Amendment Bill was passed in Parliament late yesterday and while it might take some time for the full implementation and the government is yet to decide the rate it will impose. However, a reports from PriceWaterhouseCooper and the SKP Group point out that the GST will broadly have a negative impact on the telecom sector.

Here is how they might affect the telecom operators:

– Bills may go up: Currently, telecom services are subject to a 14% service tax. The GST rate is expected to increase to anywhere between 18-20% and telecom companies may pass on this to customers. The GST has a provision for “Necessity Services” which can attract a lower rate.

“Given the importance communication services in our lives, they could easily qualify as necessity services,” SKP Group argues in its report.

– Distribution of SIMs: Distributors and agents of the sale of SIM cards are exempt from service tax currently. Similar exemptions for them may not be available under the GST regime.

“Under the current law, selling agents or distributors of SIM or Recharge Coupon Vouchers (RCVs) are exempt from Service tax. The liability to pay Service tax on the Maximum Retail Price (MRP) (which includes the agent’s/ distributor’s margin) is on the telco. As the Model GST law currently reads, in the absence of an MRP-based valuation for the telcos and specific exemption to the distributors, it appears that each leg of the sale of SIMs/ RCVs would be subject to GST. This would mean that the distributors and all retailers in the supply chain would get taxed,” PwC adds in its report.

– Place of recharge: It needs to pointed out that GST is a destination tax. PwC points out that for prepaid mobile or Internet the place of supply is the location where the pre-payment is received. In case of recharges through net banking or cards, the place of supply is the location of service recipient on the record of the supplier.

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For example, a customer recharges a friend’s number in Jammu and Kashmir through net banking, while the recharge was done in Bangalore. Where would the tax be applied? In Jammu and Kashmir or Bangalore?

– Tower infrastructure: Telecom companies are in dispute with tax authorities regarding the ability to claim CENVAT credit for materials used for construction of towers and shelters. “However, under the Model GST law, a specific restriction has been provided for input tax credit of goods and services used for construction of immovable property,” PwC says.

– Mobile wallets: Telecom companies have diversified into a number of services including mobile wallets and PwC points out that they would need to examine each nature of transaction being undertaken to evaluate the impact of such transactions. This is also going to be complicated when telecom companies who have got a payments bank licence start their operations.

– What are the positives?: The Economic Times points out that handset prices are likely to come down and manufacturers are likely to pass of the benefit to customers. “For handset makers, GST will bring in ease of doing business as they may no longer need to set up state specific entities and transfer stocks to them and invest heavily into logistics of creating warehouses in each state across the country,” it adds.

Also read: How the implementation of GST will change ecommerce

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