Service tax to be levied on transfer of spectrum

Providing clarity on spectrum trading deals, Finance Minister Arun Jaitley today said right to use spectrum and its subsequent transfer is a service which will attract service tax.
Experts feel that the move may result in increased financial burden for telecom operators, even as the same may reduce future litigation.
GSM industry body COAI said the move might result in higher costs for the consumer.
"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," Jaitley said in his Budget 2016-17 speech.

Deloitte Haskins & Sells Partner Hemant Joshi said the finance minister clarified that the transfer of spectrum is service and not transfer of intangible asset which means that service tax would be applicable on transfer of spectrum.
"As the input costs for the main input of spectrum gets costlier, it is inevitable that some or all of it will get passed on to the customer, thus leading to higher costs to the consumer," COAI Director General Rajan S Mathews told PTI.

Joshi said it is believed that CENVAT credit would be available on such service tax payment and therefore is tax neutral for assesse.

"This clarification has bought in clarity and would avoid litigations," Joshi added.
Anita Rastogi, Partner - Indirect Tax, PwC India said it will definitely hit the industry from a cash flow perspective.
"Further, the ultimate impact on consumer would have been higher in case the levy was VAT as the industry would not have got credits being a service provider," Rastogi said.
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COAI appreciated government's move to clarify Spectrum Trading as a service.
"As such, Spectrum Trading Tax being categorised as Service Tax allows telecom companies to claim CENVAT credit," Mathews said.
However, he raised concern over the clause related to levying of service tax on spectrum as it would lead to fund crunch in the sector.

He said it has also been proposed that CENVAT credit of Service tax paid on amount charged for assignment by government or any other person of a natural resource, such as radio-frequency spectrum, mines etc, shall be spread over the period of time for which the rights have been assigned.
"Deferring utilisation of input credit of Service tax would result in blockage of funds and would have a huge cash flow impact on the operators," Mathews said.
Spectrum in India, as per current practice, is allocated to telecom operators for a period of 20 years.
Government has made interest rates on delayed payment of duty tax across all indirect taxes uniform at 15 per cent, except in case of service tax collected but not deposited with the Central government, in which case the rate of interest will be 24 per cent from the date on which the service tax payment becomes due, he said.

Assignment of the right by the government to use the radio-frequency spectrum and subsequent transfers has been included under the definition of 'declared service'.
"Thus, assignment by Government of the right to use the spectrum as well as subsequent transfers of assignment of such right to use would now be construed as 'service' and liable to Service tax. Such liability will not only increase cost of service but will also result is huge cash flow issue for the operators," Mathews said.
COAI said that decision to abolish 13 different cesses under different ministries is a positive step, although the proposed Krishi Kalyan cess of 0.5 per cent levied on all taxable services with effect from June 1 could impact the prepaid business of the operators.

"Enabling provisions for availment of CENVAT credit of the said cess are also yet to be introduced," Mathews said.