Phone calls may become costlier

PUNE/NEW DELHI: Service tax could be levied on interconnect user charges paid by one telecom service provider to another, which could increase the overall burden on mobile and fixed telephone users. The revenue department is vetting a proposal to levy service tax on interconnect user charges (IUC) with retrospective effect. It has already consulted the law ministry on the issue and a final view will be taken by the Central Board of Excise and Customs (CBEC), said a senior official.

IUC is the levy paid by one telecom service provider to another for enabling calls to move from one network to the other. For instance, a call from Hutch terminating in the Airtel network could result in a service tax on the user charge paid by Hutch to Airtel. IUC came into force nearly three years ago and, after its advent, telecom service providers offering WLL, GSM and mobile communications have been paying to access each others’ networks.

Service tax is generally imposed on the service provider, who, in turn, passes on the burden to the service user. Telephone subscribers -- both mobile and fixed -- pay a 12% service tax on their monthly bills. Telecom majors, including state-owned BSNL, reckon that the levy of service tax on IUC would be tantamount to double taxation. This is because these charges are already included in the service tax charged to the consumer.

However, the revenue department is of the view that there is a case for imposing the levy on IUC. In ’02, the CBEC issued a circular saying that basic and cellular operators have to pay service tax on interconnection link charges since the facility had come under the net with effect from August 15, ’01. The earlier position was that service tax was not chargeable on this facility.

Revenue department officials contend that the levy will not translate into extra costs for telecom companies because they can claim credit for tax paid on such charges. The facility of credit on input taxes paid for both goods and services has been available since ’04. Telecom companies are mainly concerned with the past (prior to ’04) when a credit system was not in place, said sources.

Interconnectivity is a service provided between telecom companies and not between the telecom company and the subscriber. IUC falls outside the purview of telecom services defined in the service tax legislation, according to Sachin Menon, partner and head, indirect taxes, RSM Ambit.

The CBEC could also obtain the views of TR Rustogi, former joint secretary, ministry of finance, who is undertaking a comprehensive review of all circulars, instructions and clarifications on issues related to service tax.

The mandate is wide and he is also expected to make recommendations on issues not covered by circulars, but which deserve to be considered by the government for clarification in the interest of uniformity of practice.