The impact of the introduction of GST will be manifold on the telecom sector, especially telecom service providers and handset manufacturers. Apart from higher taxes that telecom service providers will have to pay, GST is expected to substantially increase their regulatory compliance and data management requirements. Telecom services will now be in the 18 per cent slab, higher than the current 15 per cent service tax. While the higher tax rate is expected to have a marginal impact, the way GST is designed means telcos will need to completely overhaul their processes.
It is complex because while India has 29 states and seven union territories, there are only 22 telecom circles. Many circles cover more than one state and union territory. The Delhi circle includes Delhi, Ghaziabad, Faridabad, Noida, and Gurgaon, covering three states. Currently, service tax collected from the Delhi circle goes directly to the central government. But since GST has two components - CGST (central GST) and SGST (state GST) - the tax collected from service providers will be pided between the central and state governments. That will mean increased paperwork.
"Once GST comes into force, telcos will have to segregate revenues emanating from each state. It will have compliance and data collection-related cost implications for telcos," says Harsh Jagnani, Vice President at ICRA.
Reconciliation of roaming revenues will also be a challenge. In mobile-to-mobile calls, termination charges of 14 paisa are paid by one telco to another. However, currently telcos may not be accounting for termination charges on voice calls between two states. "Going forward, that will not work as state-wise accounting of revenues has to be done," says Jagnani. Work is being done on telecom networks' backend to resolve the issue.
The GST troubles are not restricted to telecom service providers alone. Domestic mobile manufacturers were in a rude shock when the GST council hiked rates from 6 per cent to 12 per cent. At the same time, the tax rate for imported handsets was reduced from 18-27 per cent to 12 per cent. Nearly 80 per cent mobile phones are assembled in the country. Experts say low margins will force handset makers to pass on the costs to end consumers. Under the Make in India programme, mobile manufacturing was given a big push. Around 42 mobile manufacturing units have been set up in the past two years, producing around 13 crore handsets annually. The Ministry of Electronics and Information Technology has given assurance of providing duty differential, the industry expects sales to get affected until any such announcement.
"We are expecting sales at the distributor level to dip by 5 per cent over the next two months. Handset prices are likely to fall as distributors clear inventory," says Tarun Pathak, associate director at Counterpoint Research.