Telecom majors likely to plead for review of SC licence fee ruling

India's top telcos are expected to file a review petition against the Supreme Court's ruling to treat licence fees as a capital expenditure that could potentially prompt authorities to raise hefty retrospective demands, including penalties on operators for tax payment shortfalls of past periods.

Kotak Institutional Equities estimates Bharti Airtel could face a potential tax demand (excluding penalties) of Rs 6,000 crore for 2020-23, while Reliance Jio could be stung by a Rs 8,400-crore tax demand (without penalties) for 2017-2023.

Analysts expect the final tax demands to be higher.


Amortisation benefits
This is after factoring in potential penalties for short payment of taxes for prior periods.

While there could be an initial financial impact, sector experts expect that burden to even out over the licence period, with the tax outgo for telcos likely to decline in later years once amortisation benefits accumulate. Thus, the overall tax outgo would remain broadly similar over the licence period, compared to the existing calculations, they added. "The company is examining the (Supreme Court) order and its impact, and will decide the next course of action in due course," Bharti Airtel said in a filing to the BSE on Tuesday.

No potential tax demand estimates for Vodafone Idea (Vi) were immediately available as the telco has been running losses since the merger in August 2018. "Any retrospective demands pertaining to any past tax payment shortfalls can only be based on a review of the pre-merger financials of erstwhile Vodafone India and Idea Cellular, when they were profitable," said an analyst at a global brokerage.

Kotak called the apex court order "another adverse judicial outcome," saying retrospective tax demands on operators could potentially have a large one-off impact. It added that the accounting change would lead to higher earnings before interest, tax, depreciation & amortisation (Ebitda)/profit before tax (PBT), and lower cash flow on higher tax outgo initially.

Legal recourse
Legal experts expect India's top telcos to file a review petition - and, if required, a curative petition - against the latest Supreme Court ruling.

"The telcos are reviewing the judgement and will undoubtedly seek legal opinion to explore a review petition against the apex court ruling on the treatment of licence fee as a capital expenditure, as it has much higher tax payout implications," Mihir Gandhi, partner (tax & regulatory services) at professional services firm, BDO India, told ET. BDO works with some of India's top telcos.

Airtel, Jio and Vi did not respond to ET's queries on whether they would file a review petition against the top court's ruling.

On Monday, the top court held that variable licence fees payable by the telcos would be treated as entirely "capital in nature," and set aside an earlier Delhi High Court order that categorised licence fees before and after July 31, 1999, differently, as capital expense and revenue expense, respectively.

Till now, telcos claimed deductions on account of variable licence fee on a year-to-year basis for computing tax liability. However, with the Supreme Court treating licence fee as capex, operators must now amortise it over the remaining tenure of their permits. This is expected to lead to higher operating income/PBT, resulting in higher tax payouts.

Morgan Stanley estimates the potential impact on telco cash flows would be around 2% of revenue (equivalent to 4% of Ebitda) on a gross basis in the near-term, which would be offset by higher depreciation & amortisation charges in future years, limiting the net impact to a lower number.