THE IMPACT OF GST ON THE TELECOM SECTOR

Dr. S. C. B. SAMUEL ANBU SELVAN Ms. SUSAN ANITA ANDREW

Assistant Professor, PG Assistant Teacher of Commerce,
Department of Commerce, The American Keswick Public School, Madurai,
College, Madurai, Tamil Nadu, India Tamil Nadu

Abstract

India not only has the second largest telecommunications market, having almost 1.20
billion subscribers, but with almost 604.21 million internet subscribers it is ranked as the
country with the world’s second largest number of internet subscribers as well. This clearly
shows that the telecom sector provides not just a basic service, but it also forms a part of the
critical infrastructure of the country and is a core economic driver that has a wide outreach.
With the telecommunications sector being a mammoth sized industry, it is an absolute necessity
for the cost of consumption of telecommunication services to go down in order to broaden the
scope of the telecom business and achieve socio – economic progress. Due to the extremely
competitive conditions set by the Reliance’s Jio, which led to small players being forced to leave
the market, telecom operators have been pushed to absorb the additional costs incurred as a
result of 18% GST rate set as against the 15% paid previously. In addition to this telecom
operators are now compelled to bear the load of new compliance procedures. With estimates
showing that by 2025 India will emerge as the country with the highest number of internet users,
studying the impact of GST of this sector has become the need of the hour. This paper aims at
comparing the telecom sector before and after the implementation of GST, understanding its
current day scenario and future scope for development.
Keywords --- Telecom sector, GST, economic driver, infrastructure

I. Introduction

The introduction of GST was the biggest tax reform that India has ever undergone since
its independence. And even though almost 2 years have passed since its implementation in July
of 2017, it is still some what of a novelty. To put it simply, the Goods and Service Tax or GST as
it is more commonly known is a comprehensive indirect, multistage, destination-based tax
imposed on the supply of Goods and Services. For the purpose of tax collection goods and
services are divided into five slab rates viz., 0%, 5%, 12%, 18% and 28%.

Although on a positive note, GST is expected to divide the tax burden equally between
manufacturers of goods and service providers, build a corruption free, transparent government,
promote exports, increase the rate of employment and boost the economic growth of the country,
there are still a number of draw backs such as increased cost of tax compliance, and other
operational costs, which will ultimately prove to be a higher tax burden to the Micro, Small and
Medium Enterprises ( MSME) and since the MSME sector is a major contributing factor towards
the development of the economy, this is a significant drawback.

With the service sector contributing more than 50% of the GDP, and also playing a major
role in providing employment opportunities to both skilled and unskilled workers, it is important
to note that prior to the implementation of GST, out of the 12,76,861 service tax assesses (as on
March 2014), only the top 50 contributed towards 50% of the tax collected across the nation.
Therefore, this unified tax system, which reduces the chances of tax evasion, will increase the
collection of tax by widening the taxpayer database thereby, allowing the GDP to increase.
Additionally, with the service sector contributing to almost 66.1% of Grass Value Added, it is
also the most attractive source of attracting Foreign Direct Investment.

The impact of GST is slightly different for each industry. As far as the telecom sector is
concerned, GST will help to reduce manufacturing costs as a result of inventory management
through consolidation of warehouses and since GST has nullified the need to set up state specific
entities and transfer stock, handset manufacturers will save a major portion of logistics costs.

II. Review of Literature

Shefali Dani (2015) in the paper titled ‘A Research Paper on an Impact of Goods and
Service Tax (GST) on Indian Economy’[2] mentions that the government should take steps to
insulate the vast majority of the poor population against the resultant inflation of the
implementation of GST. The researcher also feels that though GST is a half-hearted attempt to
rationalize the indirect tax structure, it will in fact help to simplify the indirect tax system and
remove inefficiencies.

Prof. Ranjana Upashi (2017) in the research paper ‘Study on Effects of Goods
and Service Tax on Different Sectors in India’ [3] states that with the new GST rates telecom
industries will be taxed at a higher rate, which may impact the industry. But taking into
consideration the various sectors, the implementation of GST will have the a positive effect on
the economy.
 Guruprasad, Leena & H N Bhushan, Bharath. (2018) in their research titled ‘Implications
of New Goods & Services Tax on Telecommunications sector in India: Professionals’
Perception.’[4] concludes that although GST will relax complicated audit procedures and the
complications involved in inter-linking roaming and international calls, there are still some areas
od mixed opinions with regards to SIM cards and recharge coupons. They also concluded that
there was no significant association between Professional’s qualification and their opinion on
GST.

The researchers GauravJoshi, Pushpendra Thenuan and Madhavi Damle in their paper
titled ‘The impact of GST on Telecom Industry’ conclude that, the government needs to clear the
ambiguities and complexities that were present in the indirect tax regime before the
implementation of GST. Furthermore, they should consider the new ways money transactions are
carried out through the usage of advanced products such as mobile wallets.

III. Objectives of the Study

(i) To provide a conceptual framework on GST with special reference to the telecom sector.

(ii) To study the positive and negative effects of the implementation of GST on the
telecommunications sector.

IV. Research Methodology

This research is a descriptive and exploratory research that is based purely on secondary
data. The data has been collected through the usage of various internet portals, magazines,
journals, and the like.

V. Overview of Telecommunications Sector in India

The Indian telecommunications market is the second largest in the world with almost 1.2
billion subscribers. It is broadly classified into three segments viz., wireless, wireline and
internet services with the wireless market segment holding a major share of almost 98.1%. It is
one of the core economic drivers and fundamental aspects of the Indian economy - having
extensive outreach, crossing various geographical boundaries, and reaching over one billion
people is - the telecom sector.
 The telecommunications sector is one where the demand will continue to grow at a higher
rate, as a result of low tariffs, low level of penetration in urban and semi – urban areas, and a
daily increasing subscriber base. This has resulted in the creation of an intensive and hyper
competitive environment. Between April 2000 and June 2018 this industry has attracted almost $
31.75 billion dollars’ worth of FDI. This is a result of exponential growth of smartphone
penetration, cheaper tariffs, proliferation of regional content.

VI. Benefits of GST on Telecom Sector

One of the major advantages that GST provides the telecom sector is that it allows
telecommunication enterprises to avail input tax credit on purchase of goods and adjust it against
output GST liability, which under previous tax schemes was not allowed.

The telecom industry is a capital-intensive industry with major portion of costs being
incurred for the acquisition of infrastructure facilities like towers and telecommunication
equipment. The VAT applicable on such equipment was not available as input tax credit against
the service tax payable on services provided by telecom operators. Therefore, with the
multiplicity of taxes such as VAT and service taxes being eliminated, the telecommunication
sector has a huge advantage. Since full input tax credit is proposed in GST, there is a possibility
of reduction in cost of procurements.

VII. Negative Impacts of GST on the Telecom Sector

 Increased Tax Burden

The implementation of GST sees the slab rate increase from 15% to 18% this increases the
overall cost to telecommunication service providers, which will ultimately be passed on to the
customer. In addition to this, the tax rate on domestic mobile manufacturers has been increased
from 6% to 12% making locally manufactured mobile handsets costlier than imported ones, since
the tax rate for imported handsets has been brought down from 18 – 27% down to 12%. This
adversely affects the Make in India scheme, which contributed almost 80% of locally assembled
phones.

 Compliance Costs
 Mandatory Audit:
 Prior to the implementation of GST, it was not compulsory for the telecommunication
enterprises to conduct mandatory audit but after the implementation of GST, there are mandatory
audit provisions that must be complied with. This will result in an increase in the regulatory
compliance costs because of the management requirements because of the dual engagement with
tax firms as well as management service providers.

 Circle Vs. State:

As per the GST regulations, it is necessary to determine the place of supply, and for this
purpose the recipient’s address is made as the basis for determining the place of supply. The duty
of maintaining properly updated databases on a real time basis is necessary. Additionally,
telecom enterprises which had maintained circle wise accounts to account for license charges and
fees now with the introduction of GST, are required to apportion the costs and fees based on state
wise records.

This raises complications because while India has 29 states and seven union territories, there
are only 22 telecom circles. Many circles cover more than one state and union territory. For
example, the Delhi circle includes Delhi, Ghaziabad, Faridabad, Noida, and Gurgaon, covering
three states. While the service tax collected from the Delhi circle goes directly to the central
government. But since GST has two components - CGST (central GST) and SGST (state GST) -
the tax collected from service providers will be divided between the central and state
governments. That will mean increased paperwork. Telcom companies will have to segregate
revenues emanating from each state. It will have compliance and data collection-related cost
implications for the telecom companies.

 Recharge Coupons

The non-uniformity of GST rates across states is has a direct bearing on the pricing of
services. Since GST is a destination based tax, the recharge coupons which are used by
customers vary across states. For example, if the Maximum Retail Price of a recharge coupon is
Rs 100 and the GST rate is 20 percent in Delhi and 25 percent in Haryana. The talk-time offered
would be Rs 83.30 and Rs 80 in Delhi and Haryana respectively. In the absence of a uniform
GST, the parity in pricing recharge coupons for prepaid customers across states, will be a
concern. Thus, it is imperative to have uniform rate of Central GST, State-GST and Inter-state
GST for telecom services across States/ Union Territories.

VIII. Conclusion

As a result of a number of factors such as the availability of cheaper smartphones with

high computing capabilities, and cheap telephone and mobile internet services because of 4G or
LTE networks, the telecommunications sector has become one of the fastest growing and
revolutionary sectors of the Indian economy.

Since telecom services are an extremely important utility for the customers and life
without telecom services is unimaginable, service providers need to revise their pricing policy,
so as to pass on the gained benefit of GST to the end customer. There should be more clarity on
differential tax rates for goods and services to avoid juridical proceedings. Although the higher
rate of GST for the telecom sector could result in a marginally negative impact, the macro
benefits far outweigh the negatives. In conclusion, it can be said that GST on the
telecommunication sector is still in need of a lot of fine-tuning. As Martin Luther King Jr has
said ‘The time is always right to do the right thing’ – the time was indeed right for the
introduction of the landmark reform – The Goods and Services Tax.

References:

[1]https://www.academia.edu/37009527/
A_Research_Paper_on_Impact_of_GST_on_Service_Sector_of_India_?auto=download

[2] Dani S (2016) A Research Paper on an Impact of Goods and Service Tax (GST) on Indian
Economy. Bus Eco J 7: 264. doi: 10.4172/2151-6219.1000264

[3] Guruprasad, Leena & H N Bhushan, Bharath. (2018). Implications of New Goods & Services
Tax on Telecommunications sector in India: Professionals’ Perception.

[4] https://www.rsisinternational.org/journals/ijrias/DigitalLibrary/Vol.1&Issue7/10-15.pdf

[5] https://www.gstindia.com/gst-for-telecom-needs-further-tuning/
[6] https://www.pwc.in/tax-and-regulatory-services/indirect-tax/365-days-of-the-gst-a-historic-
journey/sector-analysis.html

[7]https://www.equitymaster.com/research-it/sector-info/telecom/Telecom-Sector-Analysis-
Report.asp