COAI asks govt to remove service tax on spectrum allocation

New Delhi: Cellular operators' body COAI has said that allocation of spectrum and one-time spectrum payment should not be subject to service tax of 15 per cent, as it increases the cost of providing telecom services.

"Allocation of spectrum and one-time spectrum payment should not be subject to service tax, since it increases the cost of providing telecom service (due to credit blockage/deferral), which has a direct and an adverse impact on common man," COAI said in its Budget recommendations to the government.

Globally, it is a prevalent practice to segregate sovereign functions from other commercial transactions of the government whereby sovereign functions are not subject to any tax since they do not form part of economic activity.

"Assignment of spectrum, a scarce natural resource, is an important sovereign functions of the government and treating such activity as 'service' at par with normal commercial transactions is deviation from standard practices adopted across the world," it said.

COAI has also suggested that telecom charges -- payable by one operator to another like interconnection, bandwidth charges, roaming -- should not be characterised as 'royalty', and hence should not attract 20 per cent TDS.

"Domestic as well as cross border payments in respect of a wide array of telecom services are under litigation on account of retrospective amendment in the definition of royalty...Tax authorities have now started taking a position that payments made by telecom companies, even for standard telecom services, are in the nature of Royalty, resulting in protracted litigation not only on characterisation but also on withholding taxes," it said.

The operators have also pitched for a lower TDS rate of 2 per cent on discount extended to pre-paid distributors. Telecom companies transfer pre-paid vouchers and SIM cards to independent distributors at a discount, who further sell to retailers and subscribers.

"While the industry firmly believes that provisions of section 194H...are not applicable to discount extended to pre-paid distributors, in order to put an end to litigation, a position of applicability of TDS provisions on pre-paid discount may be acceptable to the industry on a go forward basis," the COAI said.

"However, considering the low margins, it is suggested that a lower withholding rate (say two per cent) may be prescribed since the rate of 5 per cent results in drastic reduction in the margins of small scale distributors," COAI said.

Amongst other pre-Budget suggestions, COAI has also said clarification is required on the scope of exempted service for the purpose of reversal of CENVAT credit, and has also flagged imposition of service tax on the Right of Way/access charges levied by local authorities.