Supreme Court Ruling Shifts Telcos' Licence Fees to Capital Expenditure

  • 20 Oct 2023

Recently, the Supreme Court has ruled that the entry fee and variable annual licence fee paid by telecom companies in India will be categorized as capital expenditure for tax purposes, altering their accounting treatment.

Key Points

  • Potential Tax Liabilities: This decision is expected to bring additional tax liabilities for telecom companies, particularly Bharti Airtel and Vodafone Idea, estimated at around $1 billion for the current fiscal year.
  • Nature of the Ruling: The Supreme Court's Division Bench stated that these fees are capital in nature and can be amortized over time, as per Section 35ABB of the Income Tax Act.
  • Change in Accounting Treatment: Instead of deducting the entire expenditure upfront, telecom companies will now need to spread the fee over each year for tax purposes.
  • The court also overruled a previous Delhi High Court judgment that differentiated licence fees before and after July 31, 1999, as capital and revenue expenses, respectively.
  • Impact on Telcos: Currently, telecom companies deduct licence fees as expenses, allowing them to claim deductions for variable licence fees on a year-to-date basis for tax calculations.
  • However, this ruling forces them to change their accounting practices, potentially impacting cash flow.
  • Amortization Provision: The accounting change implies that licence fees will be treated as capital expenses with a provision for amortization over the licence period.
  • Initially, this may lead to higher EBITDA/PBT and lower cash flow due to higher initial tax outgo, but it is expected to even out over the licence holding period.
  • Retrospective Application Unclear: The Supreme Court's order does not clarify whether the accounting changes must be applied retrospectively.
  • Income tax authorities are expected to demand shortfalls in prior-period tax payments, along with penalties.