The recent controversy of chargeability of interconnection charges with federal excise duty (FED) in sales tax mode has raised many legal questions which need to be answered under relevant provisions of law. According to a tax expert's opinion, there is no tax evasion if interconnection charges are not subjected to FED in sales tax mode.
While explaining the whole issue, he was of the view that any telecom operator offers connections to its customers for making (outgoing) and receiving (incoming) calls. The telecom operator issues bills to its customers against outgoing calls made by them along with line rent and other charges, if any. However, no amount is charged against incoming calls. The telecom operators charge Federal Excise Duty (FED) on the entire amount of bill issued to the customers and deposit the same into the government treasury after adjusting the paid input tax, if any, as prescribed under the law.
There could be two situations in respect of making and receiving calls:
Firstly, the call is originated from the network of one telecom operator and terminated (received) on the network of the same operator, eg from one cellular company to the same company.
Secondly, the call is originated from the network of one telecom operator and terminated on the network of other telecom company, eg from one cellular company to another mobile phone company.
In the first mentioned case, the telephone line, network and resources of only one telecom operator are used for the entire call from its origination till its termination (receiving) and that operator issues bill to the customer who makes the call and charges FED thereon and deposit the same into govt. treasury.
In the second case, however, the telecom operator whose network is used for originating a call is different than the one whose network is used for the termination of call. In this case, bill of the entire amount is issued to the customer by the telecom operator whose network is used for making (originating) call, while the other operator, whose network is used for termination of that call, claims its share from the first operator. For example, if a user of PTCL dials number of a cellular company, the bill will be issued by the PTCL to such user; and, one cellular company will claim its share from PTCL for using its network for termination (receiving) of call. The amount claimed by the said one cellular company from PTCL in connection with termination (receiving) of call would be categorised as "Interconnect Charges", tax expert said.
In the above stated case, the telecom operator whose network is used for making call will issue bill to its customer for entire amount of charges to its customer making call (including the share paid to the other company receiving the call); and will charge FED on the total amount of bill and deposit the same into Govt. Treasury. Whereas, the other telecom operator claiming and receiving the interconnect charges does not charge any FED on its claim, he said.
He further explained that it is important to highlight that if the telecom operator receiving the interconnect charges would charge any FED to the first telecom operator, the said amount of FED would become the input tax (input FED) of that first operator (who has collected FED from the customer). This input tax will ultimately be adjusted against the output tax liability of that Operator. And, resultantly, the net amount of FED deposited in the govt treasury would remain the same.
Referring to the industry, tax expert said that the industry is of the view that the revenues generated from interconnect services are already fully taxed in the hands of the subscribers (customers), and accordingly there is no loss of revenue. As per industry practice, telecom operators are not charging FED on the revenue earned from other telecom operators on the understanding that these would qualify as sharing of revenue already subjected to FED when invoiced to subscribers (customers) by each telecom operator.
The issue is that whether FED would be payable on such interconnect services even though the subscribers (customers) are already burdened with FED on the whole amount including interconnect charges paid to the other telecom companies.
It is of the view that FED cannot be charged on interconnect services as the same is already charged to subscribers by the concerned telecom operators and any FED charged on interconnect services would amount to a duplicate charge, which cannot be the intention of the legislature. Since interconnect services is within the scope of telecommunication services, a question could be raised as to how could that be not subject to FED when there is no exemption provided for such services.
This raises questions, ie whether FED be charged to subscriber on the entire tariff which is inclusive of interconnect charges? If yes, why would then it be charged separately to other telecom operators, who's role is more of an intermediary in rendering services to subscribers? Whether FED is an indirect tax and by character it is to be passed on to ultimate users of the services?
Tax expert said that in case of telecommunication services, the FED is imposed on services and it is passed on to the recipient of service by the service provider. Accordingly, any intermediary involved in executing the sales whether under any agency, distribution or franchise agreements would not be construed as rendering telecommunication services and accordingly no FED would be chargeable on such services. It is the telecom operator that is responsible to collect and pay FED on telecom services as service provider to their subscribers.
Apart from this, even if it is ruled that interconnect services is independently taxable, the argument that there is no loss of revenue would certainly carry force as such FED would become output tax for one telecom operator and input tax for the other telecom operator.
From another angle, if interconnect services are considered separate excisable services, in that case the telecom operators would not charge FED to their subscribers for interconnect services as such services would be construed as provided by the other telecom operators. If this mechanism is adopted, it will rather complicate things as the other telecom operator would not be able to pass on the FED to the subscriber of other telecom operators, he maintained.
Under current mechanism, it is the responsibility of the service provider of subscribers to ensure that FED on services rendered by other service providers are levied and collected for payment to Inland Revenue, which we consider is perfectly fine and in accordance with the spirit and philosophy of indirect tax.
Tax expert said that if it is assumed that the interconnect services were subject to FED and accordingly every telecom operator were required to charge FED on revenue of every call terminated to its network (interconnect). In that case, the FED charged by the operator will become input tax for the other operator.
In this situation it is appropriate to allow special approval for adjustment of input tax to every operator by CIR against the output FED charged on past transactions by taking power from section 66 of the Sales Tax Act, 1990.
Since no revenue loss to the government has taken place as the FED on the final price charged the operator which also includes the component of interconnect and no mala fide intentions are involved, the FBR can also issue a notification under section 16(4) for allowing adjustment of default surcharge and penalty on FED relates to the past transactions, he claimed.
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