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I-T Dept May Raise Tax Demand Retrospectively From Telcos: Analysts

The income tax department may raise demand on a retrospective basis from telecom operators following a Supreme Court order, which classified licence fees paid by service providers as capital expenditure rather than a revenue expenditure, according to industry analysts.

The income tax department may raise demand on a retrospective basis from telecom operators following a Supreme Court order, which classified licence fees paid by service providers as capital expenditure rather than a revenue expenditure, according to industry analysts.

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While analysts could not ascertain potential tax liabilities on telecom operators, Kotak Institutional Equities has tentatively calculated that the liabilities could be to the tune of Rs 14,000 crore on Airtel and Jio without penalties.

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

The Supreme Court has set aside a Delhi High Court order of December 2013 and ruled that the licence fees paid by telecom operators should be treated as a capital expense, which the companies were treating as revenue expense.

"The Supreme Court judgment has not cleared the position on the applicability of this provision on a retrospective basis. However, we believe income tax authorities could raise demand for the shortfall in tax payment for the prior period, along with applicable penalties," Kotak Institutional Equities said.

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Analysts at 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 but potentially offset in later years through higher depreciation and amortisation charges.

Analysts at both firms expect telecom operators to file a review or curative in this case.

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

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.

In December 2013, the Delhi High Court (Delhi HC) 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.

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"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 Kotak report said.

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 in nature.

Queries sent to Airtel, Jio and industry body COAI elicited no reply.

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