Probable Effects of GST on India’s Telecom Sector

Probable Effects of GST on India’s Telecom Sector

The telecommunication sector has emerged as India’s core economic drivers in the last decade. The belief has truly shifted from merely being a telecom service provider to being a provider of multiple categories of Value Added Services. India is ranked second across the world when we talk as far as number of connections and subscribers are concerned. Telecom sector features among the top 5 employment generators in the country.

In the current context, the telecom sector can be broadly classified into three categories:

  • Infrastructure providers
  • Equipment manufacturers
  • Telecom service providers

With the humungous volume of subscribers and the revenue generation capacity that telecom sector possesses, it can certainly be said that the telecom sector is due for a complete overhaul considering the scenario of upcoming indirect taxation regime in the country, that is, the introduction of GST.

GST, being India’s biggest tax reform for indirect taxes is expected to amalgamate the wide-array of indirect taxes that exist in India and will surely bring in all the goods and services under one net. It is also expected to bring about an improvement in the ease of doing business in India by making way for seamless flow of goods and services without any geographical barriers.

In the current regime, the telecom industry has to encounter several hindrances such as surging taxes and certain concerns related to classification of services that hamper the growth.

Let us examine some of issues related to telecom sector under the current regime of indirect taxes and how can we expect it to change after making a transition to GST.

1. The theory of ‘Necessity Services

Perhaps, one of the major disadvantages under the GST regime can be the direct surge in the service tax rate from the current 14% to 18% as proposed in the May 18, 2017 meeting of the GST council. Since, India has a regressive taxation system, the brunt of higher tax rates would be directly transferred to the final consumer unless there is another party involved in the business chain.

With the significance of telecommunication services already known, they can easily be categorised under ‘Necessity services’.

2. Obligatory annual audit compliance

Under the current regime of indirect taxes, various telecom service providers were not required to comply with the obligatory ‘audit compliance’ under the Finance Act 1994. But, it must also be noted that they were liable to scrutiny by the audit requirements of the service tax department.

Many of the experts operating in the telecommunication industry are of a belief that VAT procedures might get adopted under GST. With amalgamation of goods and services on the cards, obligatory audit provisions will be available for both the goods and services in a similar manner. Thus, we can comprehend that telecom operators would be needed to stay in touch with at least a couple of units, one that would be responsible for compliance and other that would be required for audit purposes.. Failure to comply with either of the entities would lead to a possible conflict of interest. This will also lead to an upsurge in the compliance cost for the telecom service providers.

3. Mobile wallets

With industry norms changing on a consistent basis, telecom service provider entities have evolved multi-fold in order to deliver optimised customer service. Apart from providing the normal set of services, they have forayed into multifaceted services like internet services and other value added services. Top telecom service providers like Bharti Airtel have also gone the extra-mile and launched their respective mobile wallets for the convenience of their subscribers. A majority of the mobile wallet service providers in India opt for a closed model or a semi-closed model, as it confines the user from utilising the credit money to specialised services.

The consequence of indirect tax that will be levied on these mobile wallets still remains in dark as several experts across the country have varied opinions pertaining to its ‘point of taxation'. Under the unified tax structure, it is anticipated that a clear addition of this service into the service realm should be defined separately, thereby ending the discussion on its taxation ability.

Some issues expected to emerge under the GST regime

  • Registration on a state-wise basis may be needed, taking into account the provinces where certain services are delivered as opposed to to a centralised registration of service tax under the present regime of indirect taxation. Accordingly, certain compliances might be needed for each of the states under whose legislature the registration has been done.
  • The entire ecosystem of large business conglomerates opertaing across many states would be required to be restructured to make way for SGST driven processes.

Many of the studies of several renowned research firms across the globe enumerate that India is tipped to become a leading player in world of internet, with highest number of subscribers of internet by the end of 2025, it can certainly be agreed that there is abundant potential in rural markets for players operating in the telecommunication industry. Thus, with GST coming to the forefront, the telecom industry needs to step forward and lead the way to help improve upon existing levels of growth.

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