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Telcos’ licence fee tax

Facts for Prelims (FFP)

 

Source: IE

 Context: The Supreme Court set aside the Delhi High Court’s order that categorized license fees before and after July 31, 1999, differently, as capital expenditure (Capex) and revenue expenditure.

 

What does the judgement say?

The Supreme Court of India has ruled that the payment of entry fees and variable annual license fees by telecom companies should be considered as capital expenditure, not revenue expenditure, and therefore, they should be taxed accordingly

 

Capital expenditure vs Revenue expenditure:

Capital expenditures are typically one-time large purchases of fixed assets that will be used for revenue generation over a longer period. Revenue expenditures are the ongoing operating expenses, which are short-term expenses used to run the daily business operations.

 

Background:

Previously, Telecom firms were required to pay a one-time license fee for entry and an annual license fee linked to their Annual Gross Revenue (AGR) as per the National Telecom Policy 1999.

 

Impact of the Decision:

The judgment disallows license fees as a revenue expense for tax calculation, leading to an increase in tax liabilities for telecom companies.

 

This decision is expected to result in additional tax liabilities for telecom companies, particularly older ones like Bharti Airtel and Vodafone Idea, estimated to be around $1 billion in the current fiscal year.

  • The Supreme Court’s order has not clarified whether these accounting changes should be made retroactively, and income tax authorities are expected to demand payment for any shortfall in tax payments for the prior period, along with applicable penalties.