Budget 2016: Service tax of 14.5% on spectrum may prove negative for telcos

Also, during the spectrum auctions that the government has lined up for June-July, the industry will have to cough up Rs 77,000 cr as service tax

Telecom companies will have to cough up more in taxes as transfer of air waves will be declared a service. The Finance Minister Arun Jaitley in his Budget speech for fiscal year 2016-17 said: "I propose to amend the Finance Act, 1994 so as to declare assignment by the Government of the right to use the radio-frequency spectrum and its subsequent transfers a service, to make it clear that assignment of right to use the spectrum is a service leviable to service tax and not sale of intangible goods." Spectrum or air waves have now been identified as a "tangible asset" and as a result a service tax of 14.5% will be levied on all spectrum acquired through auctions or from other players. Telecom players are already under tremendous stress and this recent move will further add to the pressure.

Since spectrum trading guidelines have come into effect, the Aditya Birla-owned Idea Cellular has agreed to acquire air waves in Gujarat and Uttar Prade West from Videocon for Rs 3,300 crore. Reliance Jio too has entered into a spectrum trading deal with Reliance Communications valued at Rs 4,500 crore. Deals such as these will now attract a service tax of 14.5%.

Not just this, even the spectrum auctions that the government has lined up for June-July, where the cumulative reserve price is over Rs 5,00,000 crore, the industry will have to cough up Rs 77,000 crore as service tax. Analysts and telecom companies have obviously not taken this very well as this will further add to the balance-sheet stress of already indebted telecom companies. This is the last nail in the industry's coffin, said one official with a private telecom company.