Reliance Jio, Bharti Airtel May Face Cumulative Tax Demand Of Over Rs 14,000 Crore

Telecom giants Reliance Jio Infocomm Ltd. and Bharti Airtel Ltd. may face significant income tax demands following the Supreme Court's judgement on the classification of the licence fee as a capital expenditure, according to analysts.

Reliance Jio and Bharti Airtel may face up to Rs 8,400 crore and Rs 6,000 crore, respectively, excluding penalties, according to Kotak Securities Ltd.

On Monday, the apex court held that the payment of licence fees would be classified as capital expenditure and not revenue expenditure. Currently, telecom companies treat licence fees as an expense and, hence, tax deductible.

The court explained that payment of an amount in installments does not convert the nature of a capital payment into a revenue payment. This judgement of the court overturns a 2013 judgement of the Delhi High Court.

The change would mean treating it as a capital expenditure and amortise it over the licence period of 20 years, according to Kotak Securities.

"Prima facie, the accounting change would lead to higher Ebitda/PBT and lower cashflow on a higher tax outgo initially, but would likely even out over the license holding period," it said.

"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.

Morgan Stanley seconded this, saying that telecom companies will witness the accrual of higher taxes in the initial period of the license, but will potentially offset this in later years through higher depreciation and amortisation charges.

The two analysts expect telecom companies to file a review petition against the order.