The Union finance ministry has not viewed favourably a suggestion by the department of telecommunications (DoT) that licence fees paid by telecom operators should be treated as revenue expenditure.
Instead, the licence levy monies would be treated as capital expenditure, source said while reiterating the stand of the Central Board of Direct Taxes (CBDT).
However, the ministry is willing to work out depreciation norms for telecom licences, which are intangible assets.
Such fees are not treated as revenue expenditure anywhere in the world. Why should we do it then? a source asked.
Treating licence fees as capital expenditure implies that companies will not be able to set off the levies against income for tax purposes.
The provision of depreciation norms for a licence to operate services (telecom, in this case) will be a first under the Income Tax Act.
The act currently allows depreciation on certain intangible assets like patent payments and royalties, which can be written off in six years.
Nevertheless, it is not clear how the government proposes to work out depreciation norms on licence fees.
The licence levy is an annual payment and if CBDT allows depreciation on, say, a three-yearly basis, it will create problems in the last three years of the licence tenure.
The cellular telecom licence is for a period of 10 years, while the basic service licence expires after 15 years.
The problem with a three-year depreciation of the asset (annual licence fee outgo) is how a cellular company will depreciate its licence fees in the eighth, ninth and tenth years, a source said.
On the other hand, the government can either adopt a 100 per cent yearly depreciation norm or provide depreciation on the 10-year licence fee on a yearly basis.
For instance, although the yearly licence fee is Rs 100 crore, yearly depreciation can be provided for a sum of Rs 1,000 crore (in the case of a cellular project).
Earlier, the department of telecommunications had recommended to the finance ministry that licence fees for telecom service companies be treated as revenue expenditure.
This would have implied that basic and cellular telecom companies could set off licence fees against income for tax purposes.
Telecom firms wanted licence fees to be treated as revenue expenditure so that their tax liabilities would be minimal. Associations like the Cellular Operators Association of India and the telecom sub-group of the Confederation of Indian Industry (CII) had made representations to this effect to DoT.
The CBDT has been insisting that the yearly licence levies would be accounted as capital expenditure.
