The telcos are likely to file a review petition in the Supreme Court. This will be on the lines of the adjusted gross revenue (AGR) matter, where also they were hit by a adverse ruling in October, 2019. They are also likely to seek clarity from the apex court whether the applicability of this order will be on retrospective basis (1999 onwards) or on the renewed licence period.
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.
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. The Supreme Court judgment has not cleared the position on the applicability of this provision on a retrospective basis. 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.
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. 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. The telecom service providers would have the legal recourse of filing for a review of the current decision in the court.
The potential impact on cash flows would be 2 per cent of revenues or about 4 per cent of earnings before interest, taxes, depreciation, and amortisation (EBITDA) on a gross basis in the near-term on a licence fee of 8 per cent of AGR. 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. Soumyadip Roychoudhury, tax partner, at BDO India, states that this verdict would have an immense impact not just in telecom industry but across other industries as well. This would again spark the debate of license fees being revenue or capital in nature and would create precedence for future litigations.”
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.