Revisiting the Scope of Section 35ABB of the Income Tax Act

Introduction

The growth saga of the Indian telecom sector indicates different policy reforms initiated since the liberalization of 1991. The sector witnessed rationalized policies regarding ease of market access in equipment-producing multinationals, foreign direct investment (FDI) and the government’s regulatory role (DoT, 2018; Ray, 2016). The Telecom Policy of 1994 and the New Telecom Policy of 1999 (NTP) triggered substantial participation of private players along with corporatization of the Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited, public sector undertakings in 2000, setting up of a self-regulated independent regulator, the Telecom Regulatory Authority of India (TRAI), limited government role in policy framing, licencing, and spectrum allocation (Mishra et al., 2020). All those reforms help in designing a level-playing field for the private players, gradually transforming the sector from a government-controlled monopoly to a competitive multi-operator framework. The literature paints different aspects of the sector, such as service quality and customer satisfaction (Eshghi et al., 2008), the impact of competition and network effects on the significant growth of mobile services (Sridhar, 2009), advantages of policy reforms triggering significant contributions to economic growth (Pradhan, 2010), causes of slow manufacturing growth (Sridhar, 2012) and preference for mergers and acquisitions as a strategic tool to accelerate performance (Ghosh & Dutta, 2014). Research highlights critical challenges of revenue generation from mobile data (Gupta, 2015), the institutional framework for spectrum management (Prasad et al., 2016), drivers of customer satisfaction and loyalty (Saroha & Diwan, 2017) and the contribution of the Indian states in boosting the sector’s growth (Agur, 2018). Scholarship paints associations between FDI inflows, import quantum and economic growth (Datta & Lahiri, 2018), relationships among various factors driving customer loyalty (Saroha & Diwan, 2019), the significant role of the ‘Make in India’ policy in importing the parts of mobile phones with a simultaneous decrease in finished product imports (Misra & Shankar, 2019) and customer churn prediction (Jain et al., 2020).

Section 35ABB of the Income Tax Act (ITA), 1961, applies when an assessee incurs capital expenditure (licence fee) to obtain the right to operate a telecommunication services business. This section becomes effective for any capital expenditure (capex) incurred to obtain a telecommunication service licence. Payment of actual expenditure is relevant instead of the timing of such expenditure, that is, before or after the commencement of the business. The assessee is required to satisfy the conditions to claim deduction under section 35ABB, such as the expenditure should be incurred on or after 1 April 2001, wholly and exclusively for obtaining the licence for rendering the telecommunication services; the Department of Telecommunication (DoT) or any of its authorized body should grant the licence of operating the service. The term ‘expenditure’ in this section includes expenses incurred for obtaining the licence, for example, application fee, processing fee, legal and professional fee, administrative expenses incurred to obtain the licence and other expenses for securing such licence. For more than two decades, there has been an ongoing debate and controversy about the mode of licence fee payment and its clubbing or accounting treatments, leading to policy inconsistencies.

The recent SC ruling ¹ could significantly complicate the issue for the telecom industry as it is already under the siege of duopoly. Furthermore, the possibility of retrospective amendment of tax laws could trigger income-tax demand for a prior period and may lead to substantial tax payments for the sector players. It would be a herculean task for the players to calculate any outstanding tax liabilities if revenue raises demands for any shortfall, amending the tax laws retrospectively. Redefining licence fees as capex could create significant problems for the players as they treat those as revenue expenditure and match them against revenues to determine bottom lines. Again, the SC ruled it would be treated as capex and be amortized over 20 years, that is, within the duration of the licence. Consequently, the past years’ profits must be re-computed, which could lead to a substantial tax hike during the initial years of the licence. The gravity and complexity of the controversy are present in the policy changes and multiple judicial observations. The NTP of 1999 mandates a one-time entry fee and licence fee as a percentage of revenues to remain in business. In 2006, an assessment order indicated that the licence fee claimed as revenue expenditure by the assessees would be amortized gradually over the licence period. Again, in 2007, the Commissioner of Income Tax (CIT) (Appeal), New Delhi, ruled that licence fees are revenue expenditure. Deviating from the ruling of the CIT(A), in 2013, the Delhi high court (HC) held that licence fees payable up to 31 July 1999 would be capex and would qualify for tax deduction under section 35ABB, and after that, it would be a revenue expenditure on a revenue-sharing basis. The Delhi HC observed that as the licence fee payment is a part of the adjusted gross revenue, it would be revenue expenditure instead of capex. Revoking the orders of different HCs, the SC, a decade later, in 2023, ruled that although the telecom players paid licence fees in instalments, they were capex instead of revenue expenditure. However, the Telecommunication Act enacted in December 2023 attempts to address multiple challenges of the sector, but grey areas still need to be addressed, which could lead to future litigation. Against those backdrops, the study assesses the impact on the telecommunication sector.

Related Literature

In the last few years, sustainability has gained momentum in every sphere of life, including the business world, which further fortifies after the COVID-19 pandemic and global initiatives such as the Millennium Development Goals and efforts of Group-20 (G-20) member countries. The awareness of environmental facets puts immense pressure across sectors, including telecom and firms, searching for ways to reduce their environmental impacts and become more sustainable. In response, firms gradually shift from dependence on depleting natural resources to alternative resources as the former significantly fuels artificial climate changes (Koberg & Longoni, 2019). Different sectors attempt to meet customer demands and adopt sustainable management practices to arrest greenhouse gas emissions and cut carbon footprints. Even sustainability could be achievable by an organizational culture that primarily inculcates human values (Rasiah & Ren, 2023). However, research documents that many techno-enabled firms confront tough challenges to remain sustainable in managing technologies, as those could significantly harm the environment (Hansen & Lema, 2019). Government agencies are responsible for chalking out environmental policies, but in most situations, without the application of minds, they and even companies fail to assess the impacts (Caiado et al., 2018). At a national level, the government must provide specific and distinctly visible vision statements, achievable goals and preference for sustainability (Luo et al., 2019). Research suggests that for technological sectors like telecom, sustainability concerns two approaches: technical and systematic efficiency (Salvia et al., 2019). The former refers to designing more efficient socio-technical systems addressing interests related to human and non-human. The latter indicates designing economically efficient, environment-friendly, socially equitable technical systems (Rasiah, 2019). However, in a digital world, the firms’ primary focus on sustainability is how customers use their adopted technologies (Panigrahi et al., 2019). To implement systematic efficiency, telecom firms require substantial investments, which, in many instances, are complemented by FDI and other domestic and foreign institutional investments. Research further improves understanding of the impact of sustainability, which is reflected in global policy changes (Arsawan et al., 2022).

The literature paints the significant influence of investment in telecommunication infrastructure on the growth and development of an economy (Pradhan et al., 2016). Telecommunication services catalyse technological advancement and spread, substantially changing the digital landscape (Kumar et al., 2015). Consequently, economies and sectors rapidly progress based on telecommunication technologies and contribute to domestic growth (Noah & David, 2013). However, inadequate infrastructure, poor telecommunication density coupled with a paucity of power supply, low levels of economic transformation and policy uncertainty impede economic growth, as evident in African economies (Akanbi, 2013). Investments in the sector and liberalization closely trigger competition among sector players (Kim et al., 2013). Investments in developing telecommunication infrastructure are significantly related to economic development in G-20 countries (Pradhan et al., 2014). The Indian telecom network occupies the second-largest worldwide position regarding subscriber base after China (TRAI, 2021). The sector records a paradigm shift in the post-liberalized era, breaking the stigma of poor teledensity, exorbitant tariffs and low quality of services (Gupta, 2015), and currently, its tariff is one of the world’s lowest (see Saroha & Diwan, 2019). Interestingly, the sector in the last decade witnessed infamous price wars, corruption controversies and alleged over-bidding in spectrum auctions (Agur, 2018). A significant change in 2016, with the penetration of Reliance Jio, is evident in the sector, which ousted many players and reduced the number of players to four. However, the growth momentum is uninterrupted (Kulkarni & Vel, 2019), and scholars have extensively studied the critical role of information and communication technology in the Indian growth story (Erumban & Das, 2016; Ghosh & Prasad, 2012). Considering the sector’s critical role, the government is also easing the FDI norms, rationalizing telecom policy and offering tax allowances for capex under section 235ABB, following global trends (Ma et al., 2022).

The Controversy

The Division Bench of the Delhi HC on 19 December 2013, in a case between CIT, Delhi vs Bharti Hexacom Ltd. upholding the findings of the Income Tax Appellate Tribunal (ITAT), New Delhi, ruled that the variable licence fee paid by the respondents-assessees under the NTP of 1999 is a revenue expenditure and is deductible under section 37 of the ITA. Following this observation, the HCs of Bombay and Karnataka observed the same. Feeling aggrieved and dissatisfied with the judgments of these HCs, the Revenue (Income Tax Department) preferred civil appeals before the SC. Before the SC, it was controversial whether the variable licence fee paid by the assessee would be revenue in nature and deductible under section 37 or a capex deductible under section 35ABB of the ITA. Revenue before the Delhi HC contended that the assessees were granted a licence under the agreement executed under the Indian Telegraph Act of 1885 and on specific terms and conditions to establish, maintain and operate cellular mobile services. Such terms and conditions remained even after implementing the NTP of 1999. Revenue argued that the nature and character of the licence fee were unchanged, and only the computation methodology changed. Revenue further contended that as the assessees accepted the licence fee payable under the erstwhile National Telecom Policy of 1994, they cannot turn around and dispute the same under the NTP of 1999.

In contrast, the assessee argued that the licence fee payable under the NTP of 1999 is a revenue expenditure since earnings are shared, and the licence fee amount is computed upon the gross revenues and payable annually. It was further contended that a one-time entry fee was payable to commence the operation of telecom services, and a turnover licence fee was also payable. As the licence fee was payable annually, it must be a revenue expenditure matched against revenues to determine the operation results. On the other hand, the one-time entry fee is a capex but not the annual licence fee. The ITAT ruled that the variable licence fee is a revenue expenditure. Consequently, a substantial question of law arose before the Delhi HC to settle the controversy of whether the variable licence fee paid by the assessee company is a revenue expenditure deductible under section 37 or a capex deductible under section 35ABB. Upholding the judgment of the ITAT, the Delhi HC observed that section 35ABB is unlikely to assist in deciding the nature of expenditure revenue or capital incurred by the assessee towards the licence fee. The court considered different related judgments as judgments of any courts directly related to the controversy were unavailable. Considering the peculiarity of the issue and different related court rulings, the Delhi HC held that the licence fee is partly capex (entry fee) and partly revenue expenditure (annually payable fee). The HC observed that the licence fee payable by the assessee under the Indian Telegraph Act and other statutory provisions is mandatory; failure to pay such a fee could lead to suspension of business operation. Under the NTP of 1999, the licence fee payable indicates the sharing of gross revenue the assessee earns from the customers. Furthermore, the HC observed that treating the entire payment during the licence tenure as a deferred capital payment is erroneous.

Judicial Pronouncements

Challenging the Delhi HC judgment, the Revenue before the SC contended that the HC erred in bifurcating the entry fee payable in the initial four years of licence as capex and amortized accordingly; after that, from the fifth year onwards, the fee payable as a percentage of gross revenues as revenue expenditure. They argued that licence fee payment cannot be split into capex (entry fee) and revenue expenditure (payable annually) when both payments are for licence fees. The annual variable payments made on gross revenues constitute licence fees. The Revenue emphatically submitted that under section 8 of the Telegraph Act, 1885, licence fees payable irrespective of entry fees or annual variable licence fees are mandatory, or else the business licence is revoked. Section 4 of the Act further authorizes the government to grant licences to the players of the telecommunication sector to operate business against a consideration. Regarding section 35ABB, it was contended that this provision applies to payments made for ‘acquiring any right to operate telecommunication services’ irrespective of the timing of such payment, that is, before the commencement of the business or after that at any time during the previous year. As such payment is towards licence fees, that expenditure must be a capex as envisaged under section 35ABB. The expression ‘either before the commencement of the business to operate or after that’ of this section relates to the right to use the spectrum only after licence fee payment to the government irrespective of one-time or annual payments and relied on earlier SC judgments.^2,3

The respondent-assessee vehemently contested the arguments of the Revenue before the SC and submitted that the payment of the annual licence fee could not be treated as capex as such calculation has a basis on variable annual revenues. It must be a revenue expenditure and relied on SC judgments, which held that annual royalty payments are revenue expenditures.^4,5 The assessee argued that the nomenclature ‘annual licence fee’, that is, use of any particular expression, is not conclusive and unlikely to indicate the nature of a transaction, as also ruled by the SC. ⁶ The assessee further contended that annual licence fee payment unlikely leads to the acquisition of any new asset or enduring benefit; instead, such benefit, as the name suggests, is restricted to only the year for which such fees relate. As a result, the annual licence fee is a revenue expenditure. Supporting the Delhi HC judgment, the assessee submitted that the interpretation of section 35ABB by the Revenue would trigger a ballooning effect as the amortized amount would record a significant increase in subsequent years of the licence period and eventually, in the last year, the entire licence fee clubbed with brought forward amortized amount would be deductible. Such an absurd interpretation of the Revenue must be avoidable, as earlier affirmed by the Apex Court. ⁷

The SC observed that section 35ABB provides amortization of expenditure incurred towards licence fees for rendering telecommunication services. Sub-section (1) of this section categorically indicates that any expenditure incurred for obtaining a licence before the commencement of the business of telecommunication service or at any time during any previous year be allowed to deduct an appropriate fraction of such fee in the relevant assessment years. The licence fees are amortizable in equal instalments during the licence tenure. The SC held that fulfilment of a few conditions is mandatory to claim deduction under section 35ABB, such as the expenditure must be a capex, the assessee incurred such capex for obtaining a licence for rendering telecommunication services either before the commencement of the business or at any time during the previous year and the assessee incurs this capex. The SC held that the licence to operate the telecommunications business in India is under the purview of the provisions of the Indian Telegraph Act, 1885, and the Indian Wireless Telegraphy Act of 1933 as amendable from time to time.

The Apex Court, considering the rival contentions and analysing the provisions of section 35ABB and relevant laws governing licence agreements, critically analysed case laws on capex and revenue expenditure. The SC, referring to its earlier rulings, observed no ‘all-size-fits’ formula to categorize expenditure as capital and revenue; instead, such a decision is situation and case-specific.^8,9 The SC referred to an earlier judgment where it held that to differentiate between capital and revenue, the fundamental nature of the transaction must be gathered instead of documents from surrounding circumstances. ¹⁰ The SC earlier classified expenditure as capex when incurred expenditure was not a composition of operational or working expenses, ¹¹ a lump-sum payment made to the landlord as consideration for agricultural land settlement other than rent, ¹² lump-sum amount payable in instalments for acquiring an exclusive right to extract mineral,^13,14 receipt from the disposal of loom hours other than exploitation, ¹⁵ and licence fees paid for 20 years to obtain mining rights of mica.1 ⁶ The Apex Court further relied on its prior judgments where it held that under a deed of assignment, the right to carry out business is a capex, and annual payments have no relevance in the transaction nature. ³ Furthermore, the SC ruled expenditure as a capex where a lump-sum amount was payable for surrendering the export rights in a forest lease, ¹⁷ and advance lease rent payment for mining. ¹⁸

Apart from summarizing its related judgments holding expenditure as capex, the SC also analysed earlier rulings related to revenue expenditure. It observed that royalty payments by the assessee for obtaining raw materials are a revenue expenditure,^19,20 expenditure incurred for taking over units by the government for an indefinite period, ⁹ expenditure incurred for using the formula owned by a foreign company, ²¹ lease rent paid for a short duration instead of acquiring assets, ²² expenditure incurred for expediting commercial activities, ²³ expenditure incurred for accessing the rights to use goodwill instead of its acquisition, ²⁴ expenditure relates to the purchase of loom hours for operating business, ²⁵ expenditure not to create assets and changes the capital structure, ²⁶ using know-how to produce medicine instead starting a new venture, ²⁷ licence fees paid for a limited period without creating any enduring rights. ²⁸ Even the creation of assets not owned by the assessee ²⁹ is revenue expenditure.

References of related judgments guided the SC, which further fortified the factors deciding the nature of transactions, as the Courts of England followed. The periodicity of payments suggests that expenditure incurred ‘once and for all’ is a capex, and income and expenditure would recur yearly. The object of capex is to acquire, improve and dispose of capital assets. The identifiable asset test suggests the identification of a capital asset for which the assessee’s incurrence of expenditure relates. An intangible benefit requires the identification of substantial sufficiency and enduring nature. Again, expenditure yields a permanent advantage and adds to the structure of the profit-making apparatus of the assessee, which is capex. Considering its catena of judgments and the ruling of the Courts of England along with the guiding factors of the nature of transactions, the SC held that the enduring principles are inconclusive and must have uniform application when referring to the transactions’ commercial aspects. Expenditure incurred for substantial expansion of business or replacement of the equipment is capex as opposed to revenue expenditure, which relates to the operation of the existing apparatus. Expenditure incurred to acquire the assessee’s permanent right and commence new business is capex. Again, instalment payments do not convert a capex into revenue expenditure. Moreover, expenditure related to the acquisition of an asset is a capex if the asset belongs to the assess ee ³⁰ as opposed to mere rights to use, a revenue expenditure. ³¹ A critical analysis substantiates the SC’s conclusion that annual licence fees paid by the respondent-assessee are revenue expenditures, as the NTP of 1999 does not reclassify the revenue expenditure into fixed and variable components.

The Telecommunication Act, 2023

The Central Government, in December 2023, enacted the Telecommunication Act, 2023 (the Act), retaining the powers of the regulator, the TRAI, undiluted by replacing the Indian Telegraph Act, 1885, the Indian Wireless Telegraphy Act, 1933, the Telegraph Wires (Unlawful Possession) Act, 1950, and amending the TRAI Act, 1997, by incorporating television network providers within its scope. The Act attempts to win the sector’s confidence without diluting the TRIA’s power and creating scope for appointing its members from the players to retain its independence from the shackle of ‘red tapism’. Deviating from the NTP 1999, the Act prefers to use the term ‘authorization’ replacing the term ‘licencing’, indicating the government’s intention to retain flexibility, which is indispensable for fast-growing technological changes in the sector. The bifurcation of spectrum allocation with clearly defined ways, via auctions or administrative processes, is a robust step of ease of doing business (EoD), which could minimize litigation. By earmarking 19 areas, including satellite communication services, under the administration process in Schedule 1, the Act could end the chances of lobbying and other unethical practices (FE Editorial, 2023). However, critics suggest such a provision contradicts the SC judgment of 2012 ruling on mandatory auction of spectrums for all types of services. Although the Act would benefit different stakeholders, such as the consumers, they would likely get relief from strict norms for annoying callers. At the same time, the sector players and policymakers could address disputes through the online dispute–redress mechanism. The Act kept the over-the-top (OTT) services out of its ambit, the right step in the digital technology domain and for the sector players’ interest, albeit debatable. By dropping insolvency-related clauses, the Act sends a message to the stakeholders that the government is motivated to frame the telecom regulation without any interference from the other ministries and departments. However, the Ministry of Corporate Affairs and the DoT could sit together to settle the spectrum-related disputes and issues if they arise.

The Act, however, would address multiple challenges to the sector’s growth, as claimed by the policymakers, but it has gotten mixed responses from the sector players. At the same time, the opposition parties sought more clarity on several grounds. The Act prohibits the surrender of spectrum mid-way, and the absence of any financial restricting package for the distressed players could further fortify the government’s stand for its minimal interference in the financial policies of the players. Such a provision could catalyse a robust digital infrastructure and increase the penetration of new players. Rationalizing the penalty provisions by introducing graded penalties proportionate to the breach could improve the EoD and compliance level with a simultaneous increase in the enforcement rate. However, telecom experts have reservations about user privacy and government surveillance, as the Act allows the government to have mammoth interception powers with inadequate judicial safeguards. The Act empowers the government to access encrypted messaging data from platforms for public interest and during emergencies. However, experts apprehend that this could lead to grave technical challenges for the players since end-to-end encryption follows a mechanism typically integrated into the fundamental framework (Das, 2023). Moreover, the lack of specific data retention guidelines and the threat of biometric identification misuse could threaten civil liberties (BL Editorial, 2023). Stakeholders, including techno experts, raised serious concerns regarding the definitions of ‘telecom communications service’ and ‘telecommunications network’. They needed to include the OTT services in their scope, which could lead to future ambiguity. Renaming the Universal Service Obligation Fund to Digital Bharat Nidhi, with a broader scope but a transparent regulatory approach to broadband services, could undermine the Act’s comprehensive objectives. Assigning spectrums of Schedule 1 listed services through an administrative process could end a decade-old practice through auction primarily derived from the judicial interpretation, which hinders the sector’s growth in a market-driven open economy. Apart from abolishing this provision, the Act will likely create an environment that could reward innovation and improve service quality by removing entry and exit barriers.

Conclusion

The paramount significance of innovative technological and technical advancement in socio-economic prosperity and economic growth is evident in the literature (Schumpeter, 1942). Unprecedented progress and distribution of mobile services and rapid advancement of mobile technologies (4G and 5G) and computation technologies (artificial intelligence, chatbots, big data analytics, Internet of Things) report significantly changed users’ lifestyles, perceptions and modus operandi of business operations (Mian et al., 2022). Mobile technology is critical in bridging the digital divide and boosting socio-economic developments in emerging economies (Ochoa et al., 2022). Research suggests that service quality is critical in assessing performance, market share and profitability for service sectors like telecom (Kar, 2020). However, human attitudes and perceptions significantly influence service quality, which is difficult to measure (Zhou et al., 2021). Telecommunication is a vulnerable sector that loses substantial revenues due to customer churn and policy changes. The sector is technologically dynamic and exposed to frequent innovation of new technologies and products, requiring huge capex to remain competitive and sustainable. Theoretically, advanced telecommunication infrastructure and technologies trigger economic growth, liberalizing economic activities by bridging the geographical distance and facilitating decentralization. As research concurs a bi-directional long-term association among telecommunication infrastructures, economic growth and development (David, 2019), substantial consistent investment in the sector is inevitable.

In emerging economies like India, a modern telecommunication infrastructure is a sine qua non both for domestic growth and to attract foreign investments for building a robust telecommunication network, for active participation in the highly competitive global markets, and to stimulate long-run sustainability. India witnessed significant growth in mobile payment services due to the government’s planned interference, such as the ‘Digital India’ campaign and for succeeding financial inclusion missions in rural India (Mukherjee et al., 2019). The Act of 2023 proposes strict action against the erring entities’ attempts to interrupt the service, which could boost the infrastructure backing of the sector. Since 2014, the government has emphasized digitalization to boost transparency and build a pro-public e-governance system. Apart from financial inclusion, direct benefit transfer, the introduction of the Goods and Services Tax, Udyam registration for the micro, small and medium enterprises, and in other sectors of the economy, mobile service penetration is crucial. The Reserve Bank of India’s pilot projects on wholesale digital currency (e-W) launched on 1 November 2022, and a month later launched retail digital currency (e-R), are Android software smartphone based. Whenever they would see pan-India operations, the demand for mobile internet services would likely increase manifold.

The Act could likely address multiple sector challenges, but it will be unlikely a panacea as it has grey areas, as the experts indicated. One of those ambiguities relates to the possible interpretations of the rules governing OTT service despite the same falling beyond the scope of the Act. A vast scope of the term ‘telecommunication service’ defined in the Act could likely encompass OTT services, including signals and online communication services like WhatsApp. The SC observed that section 35ABB of the ITA is not a deeming provision (a section or clause of a statute or regulation indicating how something needs treatment), which probably led to an ambiguous interpretation of the definition of capital expenditure. Such ambiguity could confuse the players as they remain unsure whether to operate the OTT service for which they require authorization. Eventually, judicial intervention and block of government revenues could be imminent. Furthermore, the power of interpretation, interception, detention and blocking services could severely impact privacy and users’ rights.

Nevertheless, the interpretation of the law is at the government’s discretion. However, it is unlikely to refute the possibility of introducing licence raj by the DoT in the future. Another grey area instigating probable litigation relates to online privacy, that is, mandatory identification for availing telecom services. The new Act contradicts the SC’s earlier Aadhaar ruling, revoking the mandatory use of Aadhaar IDs for buying sim cards (Narayan & Gupta, 2023). However, contrasting the provision of the Indian Telegraph Act of 1885, the Act suggests biometric identification without alternatives or safeguards. The players could adversely suffer as all eligible citizens of Assam, for example, are unlikely to possess Aadhaar cards, and the lack of those could hinder the growth rate of the new customer base. This discrimination could lead to a judicial review of the said provision of the Act. Moreover, the wide-ranging power for internet access denial of the Act vested with the government indicates India’s lack of legislative proscription of internet shutdown, much debated in the SC relating to prolonged internet suspension in Kashmir^32,33 and even in Manipur since May 2023.

The Telecommunication Bill, 2023, was introduced as a Finance Bill in Lok Sabha on 18 December and passed on 20 December, restricting Rajya Sabha’s inputs on the draft Bill under Article 117 of the Constitution. Such restriction and lack of referral to any Parliamentary Committee probably failed to address the grey areas and stakeholders’ concerns regarding several provisions of the Act. A close review of the reservations suggests that the possibility of future litigation involving substantial questions of law will likely arise, impacting not only the service quality but even blocked revenue. Clubbing around 100 types of licences under the NTP of 1999 into three broad categories, viz., telecom services, telecom networks and radio equipment under the new Act, would fortify EoD with improved compliance and reduced disputes and litigation. The allocation of spectrums through an administrative process instead of licencing as enshrined under the NTP of 1999 is a timely step as it would minimize the chances of disputes regarding the interpretation of law, such as the definition of capital expenditure under section 35ABB of the ITA. However, the new Act could be more foolproof as interpretation of definitions could lead to disputes and litigation. Interestingly, the Internet and Mobile Association of India and Broadband India Forum welcomed the spectrum allocation through the administrative process. Such welcome indicates the end of the recurrence they apprehended concerning the retrospective amendment of section 35ABB of the ITA after the SC ruling.

The Indian telecommunication sector has witnessed policy changes and judicial interventions in the past, searching for stability; the recent SC ruling could lead to complicacy and increased tax uncertainty (BS Editorial, 2023). This ruling could create severe challenges for players like Bharati Airtel and Vodafone India across multiple ventures if the Revenue retrospectively amends section 35ABB and raises tax demands for the previous years, raising doubts about their sustainability. It would also be a herculean task to re-calculate the outstanding tax liabilities and likely to put strain if the Revenue compelled them to pay in a one-time outgo since they currently match the licence fee payments against the revenues to compute their bottom lines. Notably, research documents to counter the adverse impacts and to retrieve the losses during crises such as the COVID-19 pandemic, tax concessions and subsidies were highly preferred government public finance policy measures (Yang et al., 2020). Learning lessons from the global experience and considering the critical contribution of the telecom sector to the economy, the government should revisit the provisions of section 35ABB and extend its support to the sector players for their uninterrupted service.

The SC ruling would compel the players to change their accounting techniques as the licence fee would require treatment as a capex with a provision for amortization during the licence tenure. Such change would lead to higher earnings, lower cash flows and corresponding higher tax outgo. Admittedly, the ruling would force the players to revisit their position as they have substantially incurred expenditure to acquire the licenses. Disallowing variable licence fees as revenue expenditure could adversely impact them, as many are already under financial stress. Consequently, the government should assess the pros and cons before amending section 35ABB and abstain from its retrospective amendment, considering its probable impact on the profitability of the sector players. The government should strike a balance between two extremes—tax collection through retrospective amendment and holistic growth and development of the economy through digitalization, transparency and e-governance. Abstaining from any retrospective amendment would certainly boost sector players’ confidence and assist the government in breaking the stigma of ‘tax terrorism’ as allegedly labelled against it for its retrospective amendments of sections such as section 276CC of the ITA and a few others in the last few years.