Telecom Operators May Face Retrospective Tax Demand

Following a Supreme Court order, the income tax department may raise demand on a retrospective basis from telecom operators. The order classified license fees paid by service providers as capital expenditure rather than revenue expenditure. Analysts estimate that the liabilities could be to the tune of Rs 14,000 crore on Airtel and Jio without penalties.

Impact on Telecom Operators

Kotak Institutional Equities said in a report that the income tax authority could raise demand for the shortfall in taxes for the prior period, along with applicable penalties. This could lead to a potential significant one-time impact. Analysts expect telcos to file a review petition.

Morgan Stanley Research said the change in the treatment of license fees paid from revenue to capital expenditure could lead to the accrual of higher taxes in the initial period of the license. However, this could be offset in later years through higher depreciation and amortization charges. Analysts at both firms expect telecom operators to file a review or curative in this case.

Legal Recourse

Companies with past accumulated losses would have an option to offset some of this near-term impact as well. Hence, the impact appears quite manageable. Further, telecom service providers would have the legal recourse of filing for a review of the current decision in the court.

Current Scenario

At present, only Bharti Airtel and Reliance Jio are profitable operators while the rest of the operators -- including Vodafone Idea, BSNL, and MTNL -- are running into losses.

Background

In December 2013, the Delhi High Court ruled that a one-time license fee or entry fee paid before July 31, 1999, would be treated as capital expenditure and an annual variable fee as revenue expenditure. The Supreme Court judgment set aside the Delhi HC's earlier order, noting that the migration to the 1999 telecom policy from the 1994 policy and the variable nature of payments does not change the license fee's essence.

The apex court held that the annual variable license fee is intrinsic to the existence of the license toward the right to operate telecom services and hence remains capital.

The Supreme Court's order has significant implications for telecom operators. The income tax department may raise demand on a retrospective basis, leading to potential liabilities. However, operators have the option to file a review or curative petition. The impact on individual companies will depend on their financial situation and past accumulated losses.