Telcos seek adjustment of around Rs 35,000 crore of excess GST credit

Reeling under severe financial stress, the telecom industry has once again approached the government seeking relief in the form of adjusting around Rs 35,000 crore worth of excess GST credits in lieu of deferred-payment obligations, licence fee and spectrum charges. As per the incumbent telecom operators, over the past couple of years, their capex has increased tremendously but revenues have come down by over 30%, which has created a mismatch in output liability and input credit. As the telecom industry does not fall under the inverted duty structure — most of the services bought and sold by operators command an 18% GST rate —, the mismatch has created Rs 35,000 crore worth of excess GST credits.

The telcos have requested the government to adjust Rs 35,000 crore against their liabilities as there is no certainty yet about improvement in their revenues. Usually, the government refunds the balance between output liability and input credit to companies under the inverted duty structure wherein a lower GST rate is charged from selling services while the rate is higher for buying goods. There is no provision under GST wherein amount is refunded because of higher capex and lower income.

In a letter to communications minister Manoj Sinha, the Cellular Operators Association of India (COAI) said since the industry’s revenues have declined substantially, the output GST on revenue is unable to absorb input GST credits available. “Such a situation has led to blocking of approximately Rs 35,000 crore of operators’ capital in the form of excess GST credits,” COAI said in the letter, a copy of which is also marked to the finance ministry.

Reliance Jio, though, differs with the view of COAI regarding the relief. The government is also not likely to provide a two-year moratorium to the telecom industry on their deferred-payment obligations for spectrum bought in the past auctions despite various requests from COAI.

Government sources said apart from the fact that there is no industry consensus on the moratorium, as Jio differs with the request, the government had already given the industry concessions by raising the repayment period to 16 years from the earlier 10 and, with elections around the corner, the Opposition would position the relief as crony capitalism.

If the government accepts the plea of adjusting excess GST credits, it will be a huge relief to Vodafone Idea, which has to pay Rs 10,579 crore as spectrum installment every year. The amount for Bharti Airtel stands at Rs 5,573 crore while that of Jio is Rs 2,969 crore. Apart from that, telecom operators have to pay licence fees and spectrum charges to the government.

A combination of rising payout to the government and falling telecom revenues as a result of the RJio competition, the share of telco revenues going to the government rose from 29% in FY08 to 60% in FY18.

COAI said on an annualised basis, it is expected that the revenue of the industry will be `1,45,000 crore for FY19, lower than the revenues prevalent in FY13-14. The industry Ebitda has correspondingly dropped by 30% between quarter ended June 2016 and quarter ended September 2018, and stands at around 20%. The industry debt is estimated at Rs 7.7 lakh crore and about 50% is on account of spectrum alone. Further, a significant capex is required and being incurred (over Rs 40,000 crore per annum) for 4G coverage and capacity given exponential traffic growth.

COAI also cited that internationally, VAT/GST is typically not applicable to the government services since they are considered as ‘out of scope’ or regarded as non-economic activities or sovereign functions, which are outside the ambit of tax. In this regard, the COAI said, “Exempt regulatory levies from payment of GST under reverse charge mechanism go forward — this would ensure that further accumulation of credit on this account would cease.”