Telcos have to pay service tax for spectrum with installments

Telecom companies will have to pay service tax along with installments as part of the deferred payment option under the existing spectrum auction system, the Revenue Department said today.
However, it clarified that service tax payable, whether in full upfront or in installments, for assignment of right to use spectrum has been exempted from service tax.
"By these measures, the government has ensured that there is no new tax liability on the telecom service providers (TSPs) in respect of the services provided in the past," the statement said.
Under the existing auction system of assigning spectrum, government has provided the option to TSPs either making full upfront payment, or 25 per cent/33 per cent part upfront payment initially and thereafter making payment in equal number of installments, under the deferred payment option.

Responding to the concern raised by the TSPs on the liability of service tax under the deferred payment option, the revenue department said: "Service tax would be payable when the payments, whether full upfront or part under the deferred payment option, become due or are made, whichever is earlier.
"As a result, if a TSP opts for the deferred payment option, then the liability to pay service tax arises on the date on which the part payment or installments become due as specified in any invoice, bill, challan or any other document".

There were apprehensions among TSPs that liability to pay the entire service tax payable on the full auction price at the time of assignment would severely jeopardise their finances.

Furthermore, services provided by government by way of
allowing a TSP to operate as a telecom service provider or use radio-frequency spectrum during the financial year 2015-16 on payment of licence fee or spectrum user charges, has been specifically exempted from service tax, it added.
On the question of distributing the input-tax credit of service tax paid in respect of spectrum allocation over the period of 20 year allotment, the revenue department said the government has modified the Cenvat Credit Rules and allowed credit of service tax evenly over a period of 3 years.
Moreover, it added that the credit of Service Tax paid on spectrum user charges, licence fee, transfer fee charged by the government on trading of spectrum would be fully available in the year in which the same is paid.

The department clarified that the principles laid down for Assignment of spectrum would also apply in case of assignment of any other natural resource by government or a local authority by auction or otherwise.
Commenting on the revenue department's decision, Saloni Roy, Partner, Deloitte Haskins & Sells LLP said revision in the Cenvat rules to allow credit of the service tax paid on one time charge for right to use a natural resource over three years rather than over the period for right to use, is appreciated.
Further, the clarification pertaining to availment of credit on spectrum user charges, license fees, transfer fee on spectrum trading and on royalty in the year they are paid is beneficial for industry as this was a matter of doubt.