SCM GST Telecom Version 3

7/31/2019 SCM GST Telecom Version 3

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SCM Assignment

16 March, 2011

Submitted to:

Submitted by: Group 12

Goods & Service Tax and Its Impact on

Indias Telecommunication Sector


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TABLE OF CONTENTS

Introduction ............................................................................................................................................................................... 1

Rationale for the New Tax.................................................................................................................................................... 1

Working of GST ......................................................................................................................................................................... 3

Impact of GST on Supply Chain Management .............................................................................................................. 4

Indian Telecommunication Industry ............................................................................................................................... 5

SWOT analysis ...................................................................................................................................................................... 6

GST - A boon to the Indian Telecom Sector .................................................................................................................. 8

GST A curse to Indian Telecom Sector......................................................................................................................... 8

Hurdles in implementation ................................................................................................................................................. 8

Recommendations................................................................................................................................................................. 11

References ................................................................................................................................................................................ 12


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INTRODUCTION

The consumption tax system in India is complicated and multi-layered with levies both at the

federal and State levels. A major breakthrough in the sphere of indirect tax reforms in India

occurred with the Introduction of the Value Added Tax (VAT) at the Central and the State level.

Taxes on goods are levied by the Centre at the manufacturing level through CENVAT, on

services through the Finance Act, and on sale of goods via the Central Sales Tax Act. States levy

tax on the sale of goods independently, under their own laws. Though some degree of uniformity

had been arrived at after the introduction of the Value Added Tax, differences do persist with

extreme cases of Tamil Nadu and Uttar Pradesh who are yet to implement the VAT.

The next breakthrough in reforms is via Goods & Services Tax (GST) which aims to integratethe overall indirect tax system. The government plans a nationwide goods and services tax,

which would streamline its complex and overlapping revenue system, but the same has been

delayed twice from the targeted October, 2010 to April 1, 2011 and to April, 2012 as it struggles

to iron-out differences with the states (Shukla, A. 2011).

In this report, we first discuss the rationale that necessitates the new tax policy followed by the

working of GST. The third section deals with the impact of GST on supply chain management.

In the fourth section we provide an analysis of the telecom sector in India and impact (pros and

cons) of GST on the sector. Finally, we analyse the hurdles in its implementation and conclude

based on the overall assessment of the impact of GST on the telecom sector.

RATIONALE FOR THE NEW TAX

Rationale for the new tax has been discussed widely in the literature (Discussion Paper, 2009 &

13th Finance Commission Report, 2009) and on internet. Goods and Services Tax is expected to:

Integrate State Economies, promote exports, raise employment & boost overall growth. Create a single unified Indian Market thereby making the economy stronger. Simplify the tax collection process leading to efficient administration. Abolition/Inclusion of other taxes viz. CENVAT, Service Tax, Entertainment tax, luxury

tax, Octroi, CST, State level Sales Tax, Entry Tax, Stamp Duty, Telecom License fees,


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Turnover Tax, Electricity consumption or Sale Tax, Goods transportation tax etc. thereby

avoiding multiple layers of taxation that exist in India. GST is not an additional tax. The

previous tax regime and the GST regime are detailed in Figure 1.

Enhance the tax base by employing a tax credit mechanism to collect tax on Value-AddedGoods and Services at each stage of sale or purchase in the supply chain.

Allow a Set-off of the Tax paid on procurement of goods and services against the taxwhich is payable on the supply of the same. But the final tax burden of GST would be

borne by the Consumer as he is the final link in the supply chain and not at various points

in the supply chain.

Divide the tax burden equitably between manufacturing and services Remove the cascading effect of the indirect tax regime and bring all goods and services

(barring a few exceptions) into a dual GST regime i.e. Central GST and State GST to be

levied on the taxable value of the transaction.

Bring about a fall in prices in the long term as dealers might think of passing on thebenefits of reduced tax burden onto the consumers owing to more efficient collection,

increased compliance, smoothened tax process, reduced transaction costs and increased

tax-to-GDP ratio.

FIGURE 1: THE TAX REGIME AFTER VAT (LEFT) AND AFTER GST (RIGHT)

Entertainment

Tax

Luxury Tax

Entry Tax &

Octroi

Central Sales

Tax

VAT

Sate

Levies

Central GST, Subsumes

Cental Excise Tax

Customs duty

Addl. Custom & Excise

duties

Service tax

Central Sales tax

Surcharge & Cess

State GST, Subsumes

VAT

Entry tax

Entertainment tax

Luxury Tax

Tax on Lottery

Surcharge & Cess

GST


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WORKING OF GST

A comparison between the tax regime after VAT and the tax regime after GST is shown in

Figure 1. The proposed GST is an indirect tax on goods and services with comprehensive and

continuous chain of set-off benefits from the producers point and service providers point up to

the retailers level. It is essentially a tax only on value addition at each stage, and a supplier at

each stage is permitted to set-off, through a tax credit mechanism, the GST paid on the purchase

of goods and services as available for set-off on the GST to be paid on the supply of goods and

services. The final consumer will thus bear only the GST charged by the last dealer in the supply

chain, with set-off benefits at all the previous stages.

The illustration shown below indicates, in terms of a hypothetical example with a manufacturer,

one wholesaler and one retailer, how GST will work. Let us suppose that GST rate is 10%, with

the manufacturer making value addition of Rs.30 on his purchases worth Rs.100 of input of

goods and services used in the manufacturing process. The manufacturer will then pay net GST

of Rs. 3 after setting-off Rs. 10 as GST paid on his inputs (i.e. Input Tax Credit) from gross GST

of Rs. 13. The manufacturer sells the goods to the wholesaler. When the wholesaler sells the

same goods after making value addition of (say), Rs. 20, he pays net GST of only Rs. 2, after

setting-off of Input Tax Credit of Rs. 13 from the gross GST of Rs. 15 to the manufacturer.

Similarly, when a retailer sells the same goods after a value addition of (say) Rs. 10, he pays netGST of only Re.1, after setting-off Rs.15 from his gross GST of Rs. 16 paid to wholesaler. Thus,

the manufacturer, wholesaler and retailer have to pay only Rs. 6 (= Rs. 3+Rs. 2+Re. 1) as GST

on the value addition along the entire value chain from the producer to the retailer, after setting-

off GST paid at the earlier stages. The overall burden of GST on the goods is thus much less.

This is shown in the table below. The same illustration will hold in the case of final service

provider as well.

Stage ofSupply

Chain

PurchaseValue of

Input

Value

Addition

Value at which supplyof goods or service is

made to next stage

GST

Rate

GSTon

Output

InputTax

Credit

Net

GST

Manufacturer 100 30 130 10% 13 10 3

Wholesaler 130 20 150 10% 15 13 2

Retailer 150 10 160 10% 16 15 1


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IMPACT OF GST ON SUP PLY CHAIN MANAGEMENT

Supply chains are impacted by 3 major forces: Forces intrinsic to the organization, Market

specific forces and Fiscal forces of which fiscal consideration is the key determinant in India

(Madhvan, S., 2010). The existing indirect tax regime has several characteristics which

negatively impact supply chains. These ranges from irrecoverable taxes such as the Central Sales

Tax (CST), complex documentation of inter State movement of goods, entry barriers at State

borders resulting in long transportation times and imposition of local levies such as entry taxes

and Octroi upon physical entry of goods into designated areas. The increased cost due to taxes

force businesses to make decisions based on tax exemptions rather than operational efficiency.

GST endeavours to foster a single market in India through a seamless and uniform application of

the CGST and the SGST on all taxable supplies, throughout the supply chain. GST moves away

from origin based taxation to a destination based consumption tax i.e. all taxes will be based on

where consumption of a good or a service takes place. Also, the taxable supplies under the GST

will extend to all inter State movement of goods, including on branch or consignment transfers

not resulting in a sale of goods. This has major implications for supply chains, particularly on

classic hub and spoke arrangements of centralised manufacturing and disaggregated distribution.

These changes pose challenges for companies as to how they might engineer their supply chains

so as to be GST efficient. It is probably fair to suggest that the longer the supply chain, the more

the tax points in the GST scheme of things and hence increased compliance costs. This will lead

to compressed supply chains for GST efficiency while ensuring that the business objectives in

and around supply chains are also met. The dual GST consequently affords companies

significant opportunities for realignment of procurement, manufacturing and distribution/sales

patterns and to engineer their supply chains on purely economic rather than fiscal considerations.

GST will also help in reducing inventory costs and cash flow benefits. Currently, the CENVAT

is included in their inventory costs, which has to be financed by them. Under the new structure,the GST paid on inventory would be fully recoverable immediately as input tax credit, reducing

the inventory financing costs. Further, the dealers/retailers would be collecting GST from their

customers as they make sales, but would be required to remit it to the government only at the end

of the month or the quarter, when they file their returns. This extra cash float would allow them

to achieve scale and invest in making their operations more efficient.


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INDIAN TELECOMMUNICATION INDUSTRY

The Indian telecommunications industry is one of the fastest growing in the world. The industry

has witnessed consistent growth during the last year on the back of rollout of newer circles by

operators, successful auction of third-generation (3G) and broadband wireless access (BWA)

spectrum, network rollout in semi-rural areas and increased focus on the value added services

(VAS) market. A brief highlight of the telecom market as on Jan 11 is shown in Table 1. It can

be seen that the wireless market has been growing at a rapid pace of ~2.5% per month. However

the tele-density is still very low in the rural area signifying that the industry will continue to have

growth opportunities. As per the report by Ernst & Young, the number of subscribers is

estimated to reach 1 Billion by 2014.

TABLE 1: HIGHLIGHTS OF TELECOM MARKET AS ON JAN 11. (TRAI, PRESS RELEASE NO. 13/2011)Particulars Wireless Wireline Total

Total Subscribers 771.18 34.94 806.13

% Total Monthly growth 2.52% -0.41% 2.39%

Urban Subscribers 512.26 26.13 538.38

% Urban Monthly Growth 2.19% -0.30% 2.06%

Rural Subscribers 258.93 8.82 267.74

% Rural Monthly Growth 3.20% -0.75% 3.07%

Tele-density 64.74 2.93 67.67

Urban Tele-density 143.36 7.31 150.67

Rural Tele-density 31.05 1.06 32.11

The Indian telecom industry can be primarily divided into basic, cellular and internet services. It

also has relatively segments such as radio paging services, very small aperture terminals

(VSATs), public mobile radio trunked services (PMRTS) and global mobile personal

communications by satellite (GMPCS). The wireless segment in India is much larger (94.6%

market share) than the wire line segment and is growing steadily due to the convenience and

utility it offers. In fact, the subscriber base of the wire line segment is decreasing due to its

limited usage. Rural markets are expected to be the next key growth drivers for the Indian

telecom sector, given rural Indias growing population and disposable income. Average revenue

per user (ARPU) has been declining because of price wars but is compensated by increase in

MOU (minutes of usage) and increase in number of subscribers.


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MNP (Mobile number portability) has been the most significant change in the industry recently.

This has taken the competition to the next level and gives a wide choice to the customers. This

will change the whole business and service providers will have to maintain their service level at

its best both to maintain and attract new customers.

SWOT ANALYSIS

SWOT analysis of the Indian telecom industry is presented below.

Strengths

High Customer potential - Low rural

tele-density and broadband reach

High Growth rate High FDI limit range 74-100%

High Return on Investment - Easier to

create economies of scale

Lower CAPEX in long run because of

high area density

Weakness

Poor telecom infrastructure - large

number of call drops

Late technology adopters - Among thelast countries to lget access to 3G

technology

Most competitive market - 10 to 12

service providers in most parts

Initial investment outlay is huge

Opportunity

3G & 4G Telecom services

Quality Service - Maintain and attract

new customers with MNP

Boost for Telecom manufacturingcompanies

Telecom Equipment exports - Expected

growth rate of 26%

Horizontal integration of services

Threats

Telecommnunication policies - Launch

of 4G in 2-3 years will make 3G

obselete

Declining ARPU - Price wars will lead tosurvival of the fittest

Government partiality - Allowing 3G

option in PSU (BSNL, MTNL) before

auctioning in the market

SWOT -IndianTelecom

Industry


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GST - A BOON TO THE INDIAN TELECOM SECTOR

GST A CURSE TO INDIAN TELECOM SECTOR

HURDLES IN IMPLEMENTATION

The telecom sector is a multifarious industry with three major components;

1. Telecom service providers2. Passive infrastructure providers (i.e. the tower companies)3. Equipment and mobile handset manufacturers.

While the First Discussion Paper on GST outlines the broad contours of the proposed GST

model, it has not delineated the tax treatment for specific sectors of the economy. Hence, there is

still a lack of clarity as to how Telecom sector will be taxed, given its peculiarities and

challenges.

1. Affordability of ServicesThe total incidence of regulatory charges and indirect taxes presently borne by the

telecom sector ranges from 22 per cent to 32 per cent in value terms. The proposed GST

would subsume a majority of the federal and State indirect taxes such as excise duty,

service tax, VAT, entry tax etc. However, there is no proposal at all to include the

regulatory levies such as license fees or spectrum fees in the GST. These are at high

levels and are expected to remain so, in the near future. The telecom sector acts as a

facilitator to many other activities. With the next level of growth expected from the rural

areas, it is looked upon as a facilitator in their growth. Hence, it is essential that the rate

of GST on telecom services and on mobile phones is maintained at an appropriate level to

ensure affordability of services. This is the first and key point. This calls for a detailed

analysis of the entire supply chain of the telecom industry to identify the points which

can be taxed and ensure ease of identification of ownership, tax collection and

verification.

2. Double Taxation


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Taxability of SIM cards is a classic illustration of this problem. A transaction is either a

supply of goods or the provision of services (or possibly a bundled supply of goods and

services) and hence cannot be subject to the levy of both the sales tax and the service tax.

With the advent of the GST, a key expectation would be the resolution of this endemic

problem. The idea is to ensure that the GST applies equally, at the same uniform rate, ontaxable supplies of both goods and services. However, should the tax rate vary across

goods and services, and possibly across categories of goods themselves, the problem is

not resolved and the task would be then to ensure that the GST rules clearly categorize

telecom services as constituting a taxable supply of services, say, in order that the

problem is resolved.

3. CategorisationThe third challenge, resulting from the dual GST that is under consideration, is the

determination of the time and place of supply of telecommunication services, in order for

the appropriate CGST and, more importantly, the SGST to be charged on such supplies,

bearing in mind that the intended GST will be destination based. Typically, telecom

services are supplied by operators located centrally, to the subscribers located all across

the country. As a result, it is possible that more than one State Government may proceed

to charge SGST on such services, in the absence of clear rules.

For instance, if a subscriber based in Maharashtra avails roaming services while

travelling from say Mumbai to Bangalore, both the Maharashtra and Karnataka

Governments can potentially charge the SGST; Maharashtra by virtue of the location of

the subscriber in its State and Karnataka by virtue of the actual consumption of

telecommunication services within. To avoid such a situation, it is imperative that the

GST code incorporate clear supply of services rules, identifying the appropriate State forlevy of the SGST or formulating guiding principles to resolve such issues.

At present, multiple levies and charges are paid by the telecom companies to the Centre

as well as to the various State governments. Though the levies charged by the state might

be lower, they have significant compliant costs associated with them. This slows down

the roll out of services.

4. Mobile Phone AffordabilityYet another key imperative for the sector is taxation of another important supply chain

component - mobile phones. Clearly, these have been instrumental in enhancing

communications across all strata of society and hence a key facilitator of economic

growth. Recognising this, several countries have provided for concessional rates on such

phones. For example, in Sri Lanka, while the standard VAT rate is 12 per cent, the supply

of mobile handsets is exempt from the levy. Given the importance of the telecom sector

for Indias economic growth, especially in the rural sector, it is critical that policy makers

seriously consider these implications in the GST scheme of things.


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5. Changes in Supply Chain modelsRecently, there has been a trend in the industry, where the tower services, which

constitute the backbone of the network, are being outsourced to specialist providers such

as GTL Infra, Viom, etc. The tax laws need to be framed to identify and accommodate

such developments in the supply chain model.

Recent Examples:

1. Applicability of Service tax on services provided to customers in J&K.Currently, there is a lot of confusion on applicability of service tax on services provided to

customers in J&K. There could be situations where:

a. Services are provided from J&K and consumed within J&K - service tax not applicable,

b. Service provided from J&K but consumed outside J&K - service tax applicable

c. Services provided from outside J&K but consumed within J&K - Not clear

In the first case it is clear that the service tax is not applicable as service tax is applicable in

whole of India except for the state of J&K.

In the second case, as the services have been provided to customers outside J&K & consumed

also outside the state of J&K, service tax becomes applicable; however, there appears to be no

administrative mechanism to collect the same in J&K.

Taking a cue from the arguments taken in the second case i.e., the service tax is a destination

base tax, ideally the service tax should not be applicable but divergent views and clarificationsissued by CBEC / service tax authorities have created a lot of confusion in the mind of the tax

payers & the assessing authorities, which needs to be cleared.

COAI(Cellular Operators association of India) had approached the government to clarify the

doubts by issuing an appropriate circular that the service tax is a destination based tax and the

intent of law is very clear i.e., to keep all the services provided to customers in the state of J&K

out of the purview of service tax.

2. Simplification of taxability of telecommunication services for its effectivedistribution

Telecommunication industry offers business opportunity for millions of persons (known as

distributors) across India. Telecom operators give certain amount of commissions; allow trade

margins etc. to its distributors for doing business with them. Currently, the provisions of Service

tax provides for:


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Individual registrations, charging, collection and payment of service tax by all these

distributors.

It is administratively very difficult to ensure collection & payment of service tax by all these

distributors on monthly basis.

Also a very high percentage of these business persons are small time business units who don't

even cross the annual threshold limit of Rs. 10 Lacs to get themselves registered under the

Service tax provisions.

The telecom operators pay the service tax to the Government on the maximum service charge

which includes all trade margins offered to the distribution channel resulting into payment of

service tax on the entire telecom service offerings. Thus, there is no revenue loss to the

Government.

COAI had suggested that appropriate changes should be made in the Finance Act, 1994 to allow

the telecom industry to discharge service tax liability on distribution margins. Similar relief has

been granted to the insurance industry which also involves a huge distribution force whereby theonus to discharge service tax on distributor/associate margins has been put on the insurance

companies. The relief sought is similar to the one provided to millions of insurance agents & the

applicability of service tax on their income under the Insurance Auxiliary Service and will not

have any revenue implication.

RECOMMENDATIONS

1. Benchmarking with countries where GST is successfully implemented:Canada has successfully implemented a version of a dual GST (HST) model. There are well

defined parameters to determine the place of supply of telecom services. These can be

considered for adaptation to India as well.

The EU, as the bastion of the GST, could also be studied for identifying best practices with

regard to taxation of telecom services and, in particular, the taxation of prepaid cards/vouchers,

interconnect services, roaming services, free supplies of telecom services, bundled supplies of

mobile phones with the purchase of new telecom connections and so on.

The telecom markets of UK /Europe are very advanced in scope and scale, leading to constantly

evolving GST laws to cope with the technological advances in the sector. India could potentially

evolve a sophisticated GST regime for the telecom sector if these laws were to be analysed for

potential adoption. This is not withstanding that the EU itself is overhauling its GST laws

through the introduction of the VAT Package and the like.


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2. Providing Incentives:The various levies and charges should be included in a single tax. The fall in the revenue

should be compensated by the larger subscriber base, more revenues from the increased

usage of services and lower costs and better implementation due to simpler tax regime.

The Centre can also provide incentives to the States, such as sharing a portion of its revenues to

compensate for their losses.

The simpler process will also provide an impetus to competitive forces within the industry. This

should help to achieve the goal of increased penetration.

REFERENCES

Shukla, A. (2011). Manufacturing sector reforms and GST rollout to top Ficci's agenda. NewDelhi. http://businesstoday.intoday.in/bt/story/manufacturing-sector-reforms-and-gst-

rollout-to-top-ficcis-agenda/1/13695.html

Empowered Committee of State Finance Ministers, (2009) First Discussion Paper on Goodsand Services Tax in India,. New Delhi

13th Finance Commission, (2009). Report of the Task Force on Goods & Services Tax Poddar S., Ahmad E., (2009) Working paper on GST Reforms and Intergovernmental

Considerations in India. Working Paper No.1/2009-DEA

Madhvan, S., (2010) Dual GST will impact supply chains. New Delhi. http://www.business-standard.com/india/news/dual-gst-will-impact-supply-chains/378018/

Seksaria, G., (2009) India after GST. http://www.maritimegateway.com/mgw/index.php?option=com_content&view=article&id=46:india-after-gst&catid=51:article&Itemid=126

TRAI, (2011), Highlights of the telecom subscription data. Press Release No. 13/2011 E & Y, (2010) Telecommunications http://www.ibef.org/download/Telecommunications_

270111.pdf

http://www.business-standard.com/india/news/gst-treatmenttelecommunication-sector/399600/

Jacob, J., Jain, R., (2010) Telecom Taxation: An Assessment. Indian Institute of Management,Ahmedabad.

http://gstindia.com/ - Accessed on 13 March, 2011 http://www.financialexpress.com/ on 13 March, 2011
http://www.financialexpress.com/http://www.financialexpress.com/


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http://www.cainindia.org/news/ on 15 March, 2011 http://www.coai.in/ on 15 March, 2011
http://www.cainindia.org/news/http://www.coai.in/http://www.coai.in/http://www.cainindia.org/news/

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