The Supreme Court of India has provided a substantial financial reprieve to telecom giants Bharti Airtel, Vodafone Idea and Tata Communications by waiving the interest on tax dues stemming from its October 2023 judgment. This move is expected to save the companies approximately ₹3,000 crore.

In a significant shift from a 2013 Delhi High Court ruling, the Supreme Court in October declared that annual license fees paid by telecom operators should be treated as capital expenditure, not revenue expenditure. This reclassification increases the taxable income of the telcos as capital expenditures are not deductible from income under Indian tax law. The original High Court ruling had permitted the deduction of these fees, treating them as operational expenses.

The retroactive application of the Supreme Court's decision meant telecom companies had to reassess their tax liabilities going back to the implementation of the New Telecom Policy in 1999. This led to substantial tax dues and included significant interest on the delayed payments.

The Supreme Court's recent order, issued on May 17, acknowledged the undue financial burden this interest would place on the telecom sector.

“We have given our thoughtful consideration to the submissions advanced at the Bar. We find that since the judgment of this Court is dated 16.10.2023, and having regard to the Telecom Policy, which commenced from the year 1999, the payment of interest for the period for which the tax demand is now to be met in respect of these cases stands waived," Justices B.V. Nagarathna and Ujjal Bhuyan said in the order.

Following the October ruling, telcos started providing for the increased tax outgo. Bharti Airtel set aside ₹226.3 crore, Vodafone Idea ₹820 crore and Tata Communications around ₹200 crore. Without the waiver, the interest component alone could have ranged from ₹3,000 to ₹3,500 crore, a significant financial strain on these companies, analysts estimated.

The Supreme Court's order also clarified that this relief should not be a precedent. "The order shall not be cited as a precedent as it was passed on account of peculiar facts of the case," the Court specified, directing lower courts and tax authorities to consider this decision in related appeals.

Vishwas Panjiar, partner at Nangia Andersen LLP, said, "Considering the ramifications of its earlier order on telcos, it appears that the Supreme Court has exercised its extraordinary jurisdiction while passing the present order and has directed lower courts to keep this decision in mind while deciding on pending appeals".

Rahul Charkha, partner, Economic Laws Practice, said “presently, the telecom sector is already struggling to clear their pending AGR dues to the central government. In this regard, Vodafone Idea has filed a curative petition on October 9, 2023, against the Supreme Court judgment that rejected petitions of telecom companies seeking correction of AGR dues payable by them”

"The companies in question were compelled to reevaluate their financial structures to make provision for payment of taxes. The interest burden on the tax due by the telecom companies had accumulated since 1999-2000. The current decision of the Supreme Court shall undoubtedly reduce the financial burden of such companies,” he added.