Sales made to Indian telecom operators should be given deemed export status, says FICCI
>> Government should bring out specific amendment in Section 32 of the Income Tax Act, 1961 (“Act”) and Appendix I to the Income Tax Rules, 1962 (“Rules”) to clarify that the 3G spectrum fee payment qualifies as “Intangible asset”. Government should bring out specific amendment to proviso to Section 36(1)(iii) of the Act to provide for capitalization of interest cost incurred on capital borrowed for the purpose of acquisition of 3G spectrum, upto the date of commencement of provision of 3G services, as also to bring out specific amendment in the Act with respect to deductibility / taxability of foreign exchange fluctuation on ECB’s arising on account of increase/reduction in liability incurred for payment of 3G spectrum fee. These amendments be made applicable retrospectively from FY 2010-11
>> A clarification may be issued stating that the discount / margin retained by the Distributors in Prepaid Model should not be subject to TDS u/s 194H since the transaction between Telecom Operator and Distributor is on a Principal to Principal basis so as to avoid the on going litigation. Similarly, IUC paid by one Telecom Operator to another should not be subject to TDS u/s 194J.
>> Telecom sector should be classified under infrastructure category. Moreover, grant Infrastructure status u/s 10(23G) (which should be restored) to Independent telecom Infrastructure Services Providers. This will boost significant foreign investment in this sector which is highly capital intensive.
>> The Commissionerates of Service tax in various states are issuing Notices / Show Cause Notices denying the Cenvat credit on Tower / Tower parts that get converged as an immovable property after erection even though these are used for purely providing the telecom services. CBEC had also issued a Circular no. F.No. 137/315/2007-CX.4 dated February 26, 2008 denying CENVAT credit on Towers and parts thereof.
Non availability of credit to telecommunication towers and its parts (used to mount antennas) and also on shelters (integral to providing controlled environment) required for effective functioning of the network equipment like Base Transreceiver Station (BTS) etc) would impact investments significantly impacting the appetite for investments in the telecom sector. Therefore, it is submitted that the Government should withdraw the said Circular so as to avoid hardship faced by the Telecom Operators.
>> It is submitted that a specific clarification should be brought in to clarify that software supplied (copyrighted products supplied without granting right to commercially exploit the copyright involved therein) along with telecom equipment is taxable under the head ‘Business Profits’ (i.e. as per provisions of Article 7) under the Indian domestic tax laws read with applicable Double Taxation Avoidance Agreements and consequently there should be no requirement of withholding tax on same by Indian customers.
>> Special Additional Duty (SAD) charged at the rate of 4% on import of goods is presently available as CENVAT credit only to manufacturers which can be used towards payment of Excise duty on finished products. However, telecom operators being service providers and not manufacturer are not eligible to avail credit of the SAD, as per Proviso 3 of sub-rule (4) of Rule 3 of CENVAT Credit Rules, 2004. It is submitted that the proviso to Rule 3(4) may be deleted from CENVAT Credit Rules, to enable the service providers to avail credit of SAD.
>> In terms of the CBEC Circular No. 191/25/96 – CX dated 27th March 1996, and also the decision of Advance Ruling given in matter of Alcatel, the OFC’s used by the telecommunication industries are classifiable under the Tariff Heading 8544, which attract the basic customs duty @7.5%.
The Government of India being a signatory to the ITA Agreement has an obligation upon it to exempt the import of all goods used by the telecommunication sector. Telecom being a capital intensive industry should certainly stand to benefit from the proposed reform.
>> Keeping in view the commitment made by the Government under the above stated Agreement and also the importance of the OFC’s for the growth of Indian telecom industry and extension of telecom connectivity and high speed internet to the remote areas of the nation, the Government should consider extending the benefit of ‘nil’ rate of duty to the OFC’s used by the industry irrespective of the classification.
>> Considering the growth of industries manufacturing mobile and its accessories, the notification of granting exemption to the parts. Components from the custom duty on its imports should be extended for an additional period of one year.
>> Provide exemption from MAT to registered R&D manufacturing houses.
>> The sales made to Indian telecom operators should be given deemed export status. The deemed export status should be given to the nascent Indian Product industry to avail of low-cost working capital financing and other export-linked benefits, while leverage the growth of our domestic telecom market.
>> Allow deferred payment of excise duties, on an interest free basis for a period of 5 years for Indian products.
>> Advance Ruling facility for large Indian tax payer units (i.e. companies having more than INR 50 million tax liability per annum) should be introduced. Foreign companies engaged in supply of products / services, even where Permanent Establishment is alleged, on the basis of historical trend of available judicial precedents, an option of presumptive taxation should be granted PE in India.
>> For Foreign companies, amendment should be made to provide that even where PE is alleged, tax payer shall have the option for discharging the tax liability on presumptive basis (this should ensure peace of mind and collection of taxes in short time). Further, in cases where tax payer is suo-moto coming forward to upfront pay taxes no penalties should be levied.
>> The 5-year tax holiday and 30% deduction for the next five years available to the telecommunication sector till 31st March 2000 was reintroduced for the units commencing their operations on or before 31st March 2003. The same needs to be reviewed. Besides, Indian Telecom Manufacturing runs with a Fiscal/infrastructure disability factor of about 22% and needs financial incentives:-
> Indian Product and Manufacturing companies should be provided with the Deferred Excise and VAT for 5 years along with Export Credit Facility and Interest Subsidy.
> Deemed Export Status to sale of “Indian products” (having IPR created and registered in India) in India.
> Income tax exemption for Indian Product companies for a period of 5 years (on the lines for software exports).
> Government introduced safe harbour provisions in Budget 2009, however appropriates Rules have yet to be notified. To reduce the quantum of Transfer Pricing issues, Rules should be notified at the earliest including IT industry (including hardware designing co.) and not only for basic software companies.