Tax uncertainty

SC ruling will increase uncertainty in telecom

A recent ruling by the Supreme Court (SC) that licence fees paid by telecommunication companies after July 1999 should be treated as capital expenditure and not revenue expenditure could pose a challenge for a sector that has faced significant financial stress already. The apex court’s verdict set aside the earlier judgments by the Delhi High Court, Bombay High Court, and Karnataka High Court, which had all gone in favour of the telcos. Over the years, there have been several twists and turns around how licence fees must be paid and under which head they should be clubbed, resulting in policy inconsistencies and, therefore, unpredictability for businesses. The latest ruling may complicate matters further for the telecom sector, which is fighting the risk of duopoly. With the possibility of income-tax demand for a prior period coming into effect, the apex court verdict has triggered a fear of retrospective payment (of tax) because licence fees will be treated as capex and not revenue expenditure.

Analysts have indicated that past dues will be tough to calculate while pointing at a significant one-time outgo for older telcos such as Bharti Airtel and Vodafone India (in various ventures) if the tax authorities raise demand for any shortfall in the past years. The shift in the definition of licence fees could be problematic because currently telcos set them off against revenues to calculate profits. Once licence fees are treated as capex, they would be amortised over 20 years (duration of the licence) and profits will be computed accordingly, thereby leading to higher taxes in the initial years of the licence. The policy changes and the court rulings through the years explain the complexity of the matter. The New Telecom Policy, 1999, mandated telcos to pay a one-time entry fee and then a licence fee as a percentage of their revenue. Seven years later, in 2006, an assessment order was passed saying licence fees, claimed as revenue expenses, ought to have been amortised or gradually written off over the licence period. The following year, in 2007, licence fees were categorised as part of revenue expenditure, according to a ruling of the commissioner of income tax (appeal), New Delhi.

After a six-year lull, in 2013, the issue came up again in a Delhi High Court judgment that differentiated between pre-1999 and post-1999 licence fees. It held that licence fees payable up to July 31, 1999, should be treated as capital expenditure, and licence fees on a revenue-sharing basis after August 1, 1999, should be treated as revenue expenditure. The Delhi High Court had argued then that the licence fee expenditure could not be interpreted as capital expenditure because it was paid part of the revenue in accordance with adjusted gross revenue. Exactly a decade later, the Supreme Court accepted the Income Tax Department’s argument. Although licence fees are paid in instalments, they must not be seen as revenue expenditure, according to the Supreme Court. The central point of the apex court verdict was that a single transaction could not be split in an artificial manner into capital payment and revenue payment by just considering the mode of payment. Capex is typically defined as money spent by a corporate entity on fixed assets such as buildings, vehicles, equipment, and land. Telcos’ licence fees being described as capex may still see much litigation. Even as the sector was searching for stability, the ruling has again increased uncertainty.