The proposed dual GST is an ambitious bid to reform the present indirect tax regime with an aim to introducing a common market for goods and services in India with a uniform countrywide tax structure. Once implemented, the GST will subsume the current set of multiple taxes such as central excise, service tax, state VAT, surcharges and cesses. The first discussion paper on the GST, released by the Empowered Committee in November 2009, provides a broad framework of the proposed tax.
As per the discussion paper, GST will be a destination-based consumption tax and will comprise a Central Goods and Services Tax (‘CGST’) and a State Goods and Services Tax (‘SGST’) that will be levied on all taxable transactions of supply of goods or services.
Accordingly, the mutual exclusivity of taxation of provision of services by the Central Government and of taxation of sales of goods by the State Governments will no longer remain.
The Constitution of India is hence required to be appropriately amended so as to allow both the Centre and the States to tax all transactions involving the provision of services and supply of goods. The current taxable events of ‘manufacture of goods’, ‘sale of goods’ and ‘rendition of services’ will be replaced by the taxable event of ‘supply of goods or services’. Keeping in view the significance of such a paradigm shift in India’s indirect tax regime, it is imperative that the proposed GST regime should play an enabling role in the continuing growth of key sectors of the economy such as telecommunications, infrastructure, automotive, pharmaceuticals and others. This article and the subsequent one will deal with the appropriate treatment of the telecommunication sector under the proposed GST and later articles will do so in regard to other sectors.
By way of background, India is one of the biggest telecom markets in the world. It has the third-largest telecom network in the world and the second-largest among the emerging economies.
The contribution of the telecommunication sector to the country’s economic growth has been significant in the past few years. The sector generated revenues of approximately USD 32 billion in 2007-08, experiencing a growth of over 60 per cent, compared 2006-07.
According to some studies conducted in this regard, the telecommunications sector will have an approximate 15% share of the GDP by 2014, by far the biggest contributor to the economy. The exponential growth of this sector has also led to setting up of manufacturing facilities in India by major telecommunication equipment and mobile handset manufacturers, all of whom were earlier importing such goods into the country. A direct consequence of all this has been the significant employment generation in the sector. It is therefore fair to suggest that the growth of the telecommunications sector has majorly contributed to expanding the manufacturing base in India and in generating employment. It is important therefore that the Government frame appropriate GST law and rules so as to maintain the growth of such key drivers of the Indian economy as the telecommunications sector.
Now, the sector is characterised by three distinct segments; namely the telecom service providers, the passive infrastructure providers such as the tower companies and the equipment and mobile handset manufacturers.
The GST needs to recognize these segments of the sector and evolve a framework to ensure that the tax passes through the segments and is finally only charged on consumption of telecom services. However, the larger and much more relevant point to be addressed is the appropriate rate of taxation of telecom services and related equipment, including mobile phones.
Before we discuss the appropriate GST regime for the telecom sector, it is worthwhile looking at how the sector is currently treated under the present indirect tax regime.
Service tax on telecom services was introduced for the first time in the year 1994 and since then the telecom sector has grown to be one of the biggest contributors to the Exchequer by way of service taxes. The point to be noted however is that, in addition to the service tax, the sector is currently saddled with several other charges and levies as well, thereby leading to a very high aggregate incidence of taxes and levies. In addition, the sector has been bedevilled with a multiplicity of litigation across the three segments. Indeed, indirect tax related litigation has been the bane of the sector. To illustrate, the passive infrastructure providers have been challenged on the issue of non-availability of credits pertaining to inputs used in the construction of the relevant infrastructure.
More significantly, there has been the continuous and ongoing problem of double taxation of the telecom services themselves, from both a VAT and a service tax standpoint. Specifically, the taxation of SIM cards, prepaid cards etc. has been a problematic area for a very long time.
On the other hand, in order to ensure affordability, the indirect tax incidence on mobile phones has been kept low both at the Central level by way of a low rate Excise duty at 1% and at the State level where mobile phones have been subject to the lower or concessional VAT rate of 4%, although there have been deviations in the recent past in these rates in certain States.
These tax incentives have contributed significantly to the policy objective of promoting these services as key social development enablers.
Since the future growth in the telecom sector is to likely to happen in rural areas, affordability of services and mobile handsets will continue to play a key role in enabling this growth.
Therefore, the proposed GST must take into account the overall policy of ensuring affordability of telecom services, both through an appropriate low rate of tax on services and on mobile phones as also resolve the perennial problem of double taxation.
On the first point, it is imperative to levy GST at an appropriate rate on telecom services. As to what is an appropriate rate is a matter of debate but affordability will be key.
A low tax regime on telecommunication goods incentivises growth of telecom services, as international experience suggests. GST rates on telecom services have consequently been kept low and several countries have provided preferential treatment to the telecom sector in other ways as well.
It is also essential to ensure availability of seamless input tax credits across goods and services for this sector so that the ultimate tax on consumption of such services is kept low. On the second point, of resolving the problem of double taxation etc., one of the challenges in the GST is to determine the situs of taxation for telecom services i.e. the place of supply or use or consumption is difficult to determine. The interconnect usage charges (IUC) and roaming charges are indicative examples of telecom services wherein it is difficult to determine the situs for taxability of such services.
Given the above complexity, it is imperative that clear rules be framed in order to determine the situs of supply or the place of consumption, as the case may be, in order to enable the appropriate GST to be paid out in a simple and efficacious manner without subjecting the industry to possible double taxation, as also high compliance costs.
The Author is Leader Indirect Tax Practice
(Supported by Gautam Khattar and Pankaj Goel )