Mumbai: The Mumbai income-tax (I-T) department sent a note to the finance ministry and the Central Board of Direct Taxes (CBDT) last week saying telecom firms haven’t paid an estimated Rs 1,000 crore of tax deducted at source (TDS) while selling their prepaid products through distributors, according to two senior I-T officials, who did not want to be named.
The department’s TDS wing on 3 August conducted a survey on Vodafone Essar Ltd and Tata Teleservices Ltd for alleged non-deduction of TDS and the investigation is not over as yet. The survey covered the 2009-10 and 2010-11 fiscal years.
Although the survey covered two firms, I-T officials said other telecom firms are also not complying with TDS obligations.
The department’s note has pegged the non-payment of TDS revenue from the sale of prepaid SIM cards and recharge vouchers by distributors of telecom companies at Rs 1,000 crore.
In an email response to Mint’s query, a Vodafone spokesman said: “Revenue authorities conducted TDS survey at Mumbai circle office of Vodafone Essar on 3 August. The survey was conducted to check general TDS-related compliances. Information sought by revenue authorities was provided.”
A Tata Teleservices spokesman declined to comment.
India’s mobile phone market is growing the fastest in the world, with the second highest number of subscribers at 874.68 million at the end of May, according to the latest data from the Telecom Regulatory Authority of India.
Under section 133A of the Income-tax Act, surveys are conducted to verify the books of accounts, stock, cash and any document lying in the premises of the taxpayer.
According to one of the I-T officials, in similar disputes involving recharge coupons in the past, at least three separate judgements by the high courts of Delhi, Kerala and Kolkata have given judgements in favour of the I-T department.
“According to court judgements, discounts are subject to TDS as commission at the rate of 10%. The courts have treated the arrangement between telecom operators and distributors as a principal-to-agent relationship (commission) and not a principal-to-principal relationship (discount on sale) as claimed by the companies,” the second I-T official said.
The I-T law requires an assessee to deduct 10% TDS on commissions on technical fees.
Under section 40A of Income-tax Act, if an expense is liable to TDS and the assessee doesn’t deduct TDS, the entire expenditure is disallowed.
Pranay Bhatia, associate partner of law firm Economic Laws Practice, said: “If the commissions paid to distributors on sale of prepaid SIM cards and recharge vouchers are subject to TDS, then the telecom firms will be treated as an assessee in default under section 201 of the Income-tax Act and will have to pay not only the TDS but also interest. The tax department could also levy penalty for failure to withhold tax.”
According to Bhatia, the entire commission paid will not be allowed as deduction from taxable income of the telecom firms and allowed only in the year in which the TDS is deposited with the I-T department.
“In case of Tata Teleservices, the company has not deducted TDS on commissions of about Rs 700 crore paid to distributors for selling prepaid SIM cards and recharge vouchers,” one of the I-T officials said.
The department also assessed the Maharashtra and Goa circle of Vodafone Essar and found non-payment of TDS on commissions of over Rs 100 crore.
Romal Shetty, head of telecom practice for India at consultancy firm KPMG, said if the telecom firms had to pay TDS claims as per the I-T department claims, it will affect all telecom firms that are currently witnessing shrinking margins.
“India is having the lowest tariff in the world. The impact of this claim will certainly not be restricted to two telecom companies, but on the entire industry. Telecom companies are in huge payout mode in terms of capital expenditure for rolling out 3G (third-generation) and securing additional 2G spectrum in some of the telecom circles,” Shetty said.
The companies will have to pass on the additional financial burden to consumers, leading to further tariff increases, he added.
Tata DoCoMo, which started a tariff war in 2008, raised tariffs for new customers on 16 July. This was followed by market leader BhartiAirtel Ltd and others, including Idea Cellular Ltd and Vodafone.
Mumbai makes up about one-third of India’s total direct tax collections. The direct tax target for Mumbai this fiscal year is Rs 1.82 trillion, up 19.7% from last year.