Following the judgement of the Supreme Court that the licence fee paid by telecom operators are deemed “capital in nature,” Kotak Institutional Equities estimates that Bharti Airtel and Reliance Jio could face a tax demand of ₹6,000 crore and ₹8,400 crore respectively for the for 2020-23.

Kotak states that this retrospective tax demand could potentially have a large impact. “The SC judgment has not cleared the position on the applicability of this provision on retrospective basis. However, we believe income tax authorities could raise demand for the shortfall in tax payment for the prior period, along with applicable penalties,” said the brokerage.

On Monday, the Supreme Court on Monday held that payment of entry fee as well as variable annual licence fee under the New Telecom Policy of 1999 is to be regarded as capital expenditure and amortised in accordance with Section 35ABB of the Income Tax Act.

The SC judgment sets aside the Dec 2013 Delhi High Court judgment of the annual licence fee being revenue expenditure. Currently, telcos treat licence fees as an expense and hence, tax deductible. However, after the judgment, the licence fee would have to be treated as a capital expense, with a provision for amortisation of the licence fee over the period for which licence had been granted.

“Prima facie, the accounting change would lead to higher EBITDA/PBT and lower cashflow on higher tax outgo initially, but would likely even out over the licence holding period. We believe the income tax authority could raise demand for the shortfall in taxes for the prior period, along with applicable penalties, which could lead to a potential significant one-time impact,” Kotak said.

Kotak expects the telecom firms to file a review petition.

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