In a blow to telecom companies in the country, the Supreme Court has held that payment of entry fee as well as variable annual licence fee made by telcos will be considered capital expenditure and not revenue expenditure, and taxed accordingly. The decision could bring in additional tax liabilities for telecom companies – especially for older telcos Bharti Airtel and Vodafone Idea – to the tune of $1 billion in the current fiscal year, according to industry estimates. What did the Supreme Court rule? Disposing an appeal by the Income Tax Department clubbed with 33 similar petitions, a Division Bench comprising Justices BV Nagarathna and Ujjal Bhuyan said: “We hold that the payment of entry fee as well as the variable annual licence fee paid by the respondents-assessees to the DoT (Department of Telecommunication) under the (New Telecom) Policy of 1999 are capital in nature and may be amortised in accordance with Section 35ABB of the (Income Tax) Act.” This essentially means that instead of deducting the entire expenditure all at once, the company will need to deduct a portion of the total fee over each year for tax purposes. As part of its judgement, the top court also set aside a Delhi High Court order that categorised licence fees before and after July 31, 1999, differently, as capital expense and revenue expense, respectively. How will the order impact telcos? Currently, telecom companies treat licence fees as an expense, claiming deductions on account of variable licence fees on a year-to-date basis for computing their tax liability. But, experts said, due to the accounting change that the order forces them to make could lead to lower cash flow. “.after the judgement, the licence fee would have to be treated as a capital expense, with a provision for amortisation of the licence fee over the licence period. Prima facie, the accounting change would lead to higher EBITDA/PBT and lower cashflow on higher tax outgo initially, but would likely even out over the licence holding period,” according to a Kotak Institutional Equities report. Mihir Gandhi, Partner, Tax & Regulatory Services at BDO India said that the earlier Delhi HC order “seemed to provide a reasonable basis to decide on the deductibility of the payments made by the telecom operators to obtain the telecom licence. The various telecom operators who have incurred substantial expenses to obtain a licence will have to revisit the position taken with respect to the deductibility of the expense. The disallowance of the expenses would adversely impact the companies which are already suffering a huge loss”. It is worth noting that the Supreme Court’s order has not clarified whether the changes to the accounting structure will have to be made on a retrospective basis. According to the Kotak report, the income tax authorities are expected to raise demand for the shortfall in tax payment for the prior period, along with applicable penalties. Telecom companies are likely to file a review petition and the actual tax liability could get delayed, as per the report. In an update to the stock exchange Tuesday, Bharti Airtel said that the company was examining the order and its impact and will decide the next course of action in due course.
