Service tax blow for spectrum, coal bidders

Companies bidding for telecom spectrum and coal blocks might be in for a shock, as the Budget has proposed an enabling provision to allow service tax at 14 per cent on “all services” provided by the government to business entities.

“As of today, this will practically mean any service, including allocation of spectrum or mines, will attract service tax on the fee or royalty to be paid by companies,” says Sachin Menon, chief operating officer (tax), KPMG.

Eight telecom companies, including Bharti Airtel, Vodafone and Idea Cellular, on February 16 deposited Rs 20,436 crore as earnest money to participate in the sale of 2G and 3G telecom airwaves. At the base price, the government is estimated to earn at least Rs 80,000 crore from sale of airwaves. Service tax could bring an additional Rs 11,200 crore of revenue to the government.

Besides, the first round of coal block auction that ended in February saw some key names from industry bagging 18 mines, with a combined extractable reserve of 90 million tonnes, along with attached end-use infrastructure. Some of the earlier owners of coal mines — Hindalco, Balco, Jindal Steel & Power (JSPL), GMR and CESC — bagged most of the blocks. Of them, JSPL won back one of the blocks that it had lost after a Supreme Court order cancelled allotments.

According to the auction amount and royalty payable, six mineral-rich states are likely to earn a little more than Rs 1 lakh crore over the next 30 years. This means an additional Rs 14,000 crore revenue for the government on an immediate basis.

“All these might attract service tax if the allotment processes are completed after enactment of the new law,” says Menon.

Besides, there are more such auctions expected in the near future to help the government boost its tax collection. It could not be confirmed if there was any such practice outside India where a government’s support to corporate entities attracted service tax.

The new arrangement will be effective from a date to be notified by the government after the enactment of the Finance Bill, 2015. The Budget session of Parliament ends on May 8 and the notification is expected soon after.

“They have created an enabling provision for levy of tax on services provided by the government, but the extent to which it will be covered will depend on what the government decides in the law,” says Bipin Sapra, tax partner, EY.

“Based on the present information, there could be additional cost for businesses to avail of government resources,” adds Amit Bhagat, partner (indirect tax), PwC India.

In his Budget speech, Finance Minister Arun Jaitley had said all services provided by the government to business entities, unless specifically exempt, would become taxable. The Finance Bill says: “In section 66D of the 1994 Act, with effect from such date as the government may, by notification in the Official Gazette, appoint — (1) in clause (a), in sub-clause (iv), for the words “support services”, the words “any service” shall be substituted”.