Airtel, Jio may face Rs. 14,400cr tax bill: Here's why
The Supreme Court's recent decision to classify telecom operators' license fees as "capital in nature" could result in hefty tax demands for Bharti Airtel and Reliance Jio. According to Kotak Institutional Equities, the companies may face tax demands of Rs. 6,000 crore and Rs. 8,400 crore, respectively for 2020-2023. The retrospective tax demand could have a significant impact, as the Supreme Court judgment has not clarified whether this provision applies retroactively.
Supreme Court's decision on telecom license fees
The Supreme Court ruled that the entry fee and variable annual license fee paid under the New Telecom Policy of 1999 should be considered as capital expenditure. This is a reversal of the Delhi High Court's 2013 decision that treated the annual license fee as a revenue expense. Currently, telcos treat license fees as an expense and hence, tax deductible. However, now the license fee would have to be treated as a capital expense.
Potential impact on telecom companies' financials
The accounting shift resulting from the Supreme Court judgment would lead to higher EBITDA/PBT and lower cash flow due to increased tax outgo initially, Kotak said. However, this is expected to balance out over the license holding period. The research firm suggests that income tax authorities could raise demands for the shortfall in tax payments for prior periods, along with applicable penalties, leading to a potentially significant one-time impact on telecom companies.
Telecom firms expected to file review petition
In light of the Supreme Court's ruling and its potential financial implications, it is anticipated that Bharti Airtel and Reliance Jio will file review petitions. The outcome of these petitions will determine the final impact of the judgment on the companies' financials and the Indian telecom industry as a whole.
