There’s been good news on the tax front for India’s telecommunications industry. However, one of the beneficiaries, operator Vodafone Idea, has received less positive news from banks relating to letters of credit.
In what is described as a major development for the telecommunications industry, India’s Supreme Court has overturned a tax ruling by a lower court and allowed a number of companies to claim tax credits for which they were previously considered ineligible.
The Bombay High Court had classified these items as non-capital goods for which credit would not be available, thereby denying the companies central value-added tax (CENVAT) credit for the duties paid. The Supreme Court, however, ruled in favour of telecommunications companies, affirming their entitlement to claim credit for duties paid on parts such as tower components and green shelters.
It’s a boost for operators, easing the financial burden related to infrastructure expenses. Other companies, notably Tata Teleservices and Indus Towers, are also likely to benefit.
However, India’s Economic Times (ET) news service has also reported that banks have sought extra collateral from Vodafone Idea (Vi) to process its request for additional letters of credit to be issued to its suppliers – big names such as Nokia, Ericsson and Samsung.
Letters of credit are a short-term exposure for banks, but an exposure nonetheless, and it hasn’t helped that the Supreme Court recently rejected Vi's petition for a review of a 2019 judgment on the computation of adjusted gross revenues (AGR) payable by telecom firms. This may have worried some banks. And of course Vi is managing titanic historical debts.
Any hold-up in the availability of letters of credit could delay Vi's investment plans and potentially prevent the company from placing fresh equipment orders. The company, however, has said it has sufficient funds to execute its capex plans for the 2025 financial year.
