Spectrum Trading and Indirect Taxation: A Perplexed Scenario

What is Spectrum Allocation –

The word spectrum is used in reference to the use of frequency bands by telecom service providers to enable communication between wireless cellular communication devices. Communication in general, happens through radio frequencies where a device accepts a frequency it recognizes and processes it for the user. The telecom spectrum uses frequencies in the same manner, for wireless communication. These frequencies are controlled, regulated and allocated by the government through its regulatory body, the Department of Telecommunication (DoT). Such regulation is necessary because
these frequencies are limited being a limited natural resource and must be optimally used as well as to ensure no two bands interfere with each other. Spectrum allocation entails a two-fold understanding, one is the distribution of frequencies through the National Frequency Allocation Plan (NAPF) which is the basis for development and manufacturing of wireless equipment and spectrum distribution in the country[1]. The frequency bands are distributed among satellite communication, marine and aeronautical navigation, radio broadcasts, tv broadcasts, defense forces, telecom service providers and so on. This is the broader meaning of spectrum allocation, where the whole natural resource is distributed among all the aspects that make use of it. Spectrum allocation in terms of telecommunication means its distribution among the various kinds of technologies like GSM and CDMA in the various generations as well as granting of specific bands to competing service providers. For example, in India, the 2G, GSM technology has been given the band of 900 Hz and 1800 Hz and CDMA has been allotted 800 Hz at present[2]. The whole wave distribution mechanism was explained in the case of Bharti Airtel Ltd. v. Union of India.[3]

In the case of Digital Radio (Mumbai) v. Union of India[4], it was submitted on behalf of the respondent that “Radio waves which include the FM bands need to be closely watched and regulated by the government to ensure that there is no threat to the security and integrity of the nation.”

In the present times however, allocation of additional frequency has become necessary since each allocated Hertz can accommodate a certain number of calls and if a telecom operator has to take additional calls, they will have to be allotted additional spectrum[5]. Now, with larger masses of the population rapidly adopting technological advancement, additional allotment is likely to be indispensable.


 Transaction sketch in Spectrum trading –

Spectrum trading means transfer of right to use the spectrum[6]. Since spectrum is a limited resource, there is a certain quantity of it available in the market which initially was bought and sold between operators and the government only but since trading was allowed it was bought and sold between operators as well.

The scarcity of spectrum was discussed in the case of Centre for PIL and Ors. v. Union of India[7] and others, also called the ‘2g case.’ In this case, allocation of spectrum to providers of 2g services was meant to be on a ‘first come first serve’ basis as issued by the DoT. The chief accused, A. Raja (Minister of Information and technology at the time) however, manipulated the issuance by bringing forward the date of application from 1October to 25 September and announcing on the website that only those applying between 3.30 and 4.30 would be allotted spectrum. The complainants alleged that such allotments led to huge losses where the government could have made one and half lakh rupees more than it did while the respondents continued to contend that there were no losses instead a profit was made on the allotment of 2g spectrum. Based on a long series on investigations by the CBI and Tax Authorities, the court in this case declared that the allotment of spectrum was unconstitutional and arbitrary and the application deadline manipulation was held illegal. The Congress Government which was in power at the time as well as the ministers faced great flak and embarrassment when this scam was unearthed.

In 2015 guidelines were provided for spectrum trading while stating its significance. The DoT in its guidelines said that it leads to greater competition, provides greater incentive for innovation, better/ new services being available to customers at a cheaper tariff, better choice to customers etc.[8] Spectrum leasing is not allowed so only ownership rights may be transferred from the seller to the buyer[9]. Since spectrum is allocated for a fixed term, it has been clarified that the trading of spectrum will not alter the original validity period of the spectrum[10]. Spectrum trading is permitted only on a pan Licensed Service Area (LSA) basis i.e. the seller cannot give only a part of the allotted spectrum to the buyer, the transaction will have to be in whole[11]. LSA is a service area for operation of a cellular mobile network e.g. Delhi, Mumbai, Gujarat, Punjab etc. The seller is mandatorily required to clear his dues before entering into any transactions under this policy. The government said that frequencies in 800 MHz, 900 MHz, 1800 MHz, 2100 MHz, 2300 MHz and 2500 MHz bands can be traded between two telecom operators only two years after they have been assigned, won in an auction or received through a deal[12]. An operator wanting to sell spectrum that was allocated by the government needs to convert it into tradable airwaves by paying a market price to the government[13]. The parties to such a transaction will have to give a 45 day prior intimation as well as an undertaking that all terms and conditions for spectrum trading have been complied with[14]. A non-refundable transfer fees of one percent of the transaction amount or the market price of spectrum, whichever is higher, shall be imposed on all spectrum trade transactions and has to be paid by the buyer to the Government[15]. This particular point faced opposition from telecom companies but was sustained anyway.

National Telecom policy and recent guidelines for trading of access spectrum –

In India frequency allotment to a service provider is for a period of twenty years. Some are able to rise rapidly in this period and acquire a large customer base but some may not be able to do so. This results in disparity in the usage of allotted spectrum where some are overworked and some underutilized. Spectrum trading aids this situation by transfer of resources from the excess holder to the ones that don’t have enough. Licensing was the first step towards the telecom policy in India. In 1992, licences for cellular phones were introduced for the first time in the four metros (Bombay, Delhi, Calcutta and Madras) in India. In 1994, private participation in telecom was encouraged by the Ministry of Finance. Modified and improved National Telecom Policies were formed and implemented in 1999 and 2012[16]The National Telecom Policy, 2012 introduced Unified Licensing Regime along the recommendations of Telecom Regulatory Authority of India (TRAI). Under the regime, service operators can provide converged services. It aims to provide a single licence framework, un-bundle spectrum from licences, and liberalise spectrum.  It aims at transforming mobile devices into instruments of social empowerment by implementing e-governance and m-governance, and has emphasized on security of networks and secure services to consumers[17]. The key features of the 2012 policy are-

(1)     There were two kinds of licenses in the 1999 Telecom Policy, Unified Service Licence (for telegraph service in various geographical areas) and Unified Service Access Licence (for basic and cellular services in defined areas). The new policy aims at simplification of licensing framework by establishing a unified license for all telecom services and conversion to a single-license system for the entire country as well as removing roaming charges.

(2)     At present spectrum bands are reserved according to the technologies that exploit them. The new policy seeks to liberalise such policy by de-linking it from all future licenses.  Spectrum would be reframed so that it is available to be used for new technology and move to a system where spectrum can be pooled, shared and traded.  As a result bands will not have to be reserved to an exploitable technology. Thus, 800 Hz will not be exclusively for CDMA use but have universal utility. Periodic audits of spectrum usage would be conducted to ensure efficient utilization of spectrum.  The policy aims at making 300 MHz of additional spectrum available for mobile telecom services by the year 2017 and another 200 MHz by 2020[18].

(3)     The policy aims to increase density of rural telecommunication from the current level of approximately 39% to 70% by 2017, and 100% by 2020.  It seeks to provide 175 million broadband connections by the year 2017 and 600 million by 2020 at a minimum 2 Mbps download speed[19].  Higher download speeds of 100 Mbps would be made available on demand.  Broadband access to all village panchayats would be made available by 2014 and to all villages by 2020[20].  The policy aims to recognise telecom, including broadband connectivity, as a basic necessity like education and health, and work towards the ‘Right to Broadband’.

(4)       The policy seeks to incentivise and give preference to domestic telecom products in procurements that (i) have security implications for India; or (ii) are for the government’s own use.  It also seeks to establish a Telecom Finance Corporation to mobilise and channelise finances for telecom projects.

(5)    The policy seeks to review the TRAI Act to remove impediments to effective functioning of TRAI.  It also seeks to review the Indian Telegraph Act, 1885.  The need to review the Indian Telegraph Act, 1885 was also recognised in the 1999 Telecom Policy[21].


Unified license agreement –

The National Telecom Policy, 1999 spoke of two kinds of licenses i.e. the Unified Service Licence and the Unified Access Service Licence each serving its own distinct purpose. While the former was for providing telegraph services to various geographical areas, the latter was for basic and cellular services in defined service areas i.e. the Licensed Service Area (LSA)[22]. The new policy targets simplification of licensing framework by establishing a unified license for all telecom services and conversion to a single-license system for the entire country. TRAI has also recommended moving to a unified licence framework under which a single licence would be required to provide any telecom service.  It has also recommended that spectrum should be liberalised so that any technology could be used to exploit it. Thus, the Telecom Policy envisages have a single license for all kinds of communication systems as well as freedom from technology-specific exploitation of frequencies. This implies a two-fold expansion of bandwidth access to all forms of telecommunications where any device can function on any frequency. It also seeks to remove roaming charges and mobile number portability[23]. Further, it envisages providing secure, reliable, affordable and high quality converged telecommunication services anytime, anywhere for an accelerated inclusive socio-economic development. One of the objectives of the National Telecom policy-2012 is “Strive to create One Nation – One License” across services and service areas[24]. The latest Telecom Policy therefore seeks to unlimitedly expand the horizons of frequency usage by legitimate service providers irrespective of their nature of license, technology etc. The guidelines specify that the licensee “shall not hold any other license for the services covered under the scope of Unified License. In case the Licensee obtains any other License by way of acquisition or merger, the License so obtained shall have to be migrated and merged to the aforesaid Unified License as per prescribed procedure.” this means now no telecom operator can hold any stake in a rival operator in the same circle[25]. The Unified License guidelines also make it mandatory for licensees to migrate to the Unified License if they wish to expand the scope of their service to include any additional service or service area. In case of merger and acquisition by licensee with a telecom service provider that has not migrated to Unified License, the merged entity will have to migrate to it[26].

Upon migration, the new Unified License shall be for a period of 20 years, irrespective of the validity period of the license it already held. But the option of renewal for further 10 years also exists, with the guidelines saying “The Licensor may renew, if deemed expedient, the period of License by 10 years at one time, upon request of the Licensee, if made during the 19th year of the license period, on the terms specified by the Licensor, subject to extant policy. The decision of the Licensor shall be final and binding in this regard.[27]

The Unified License will be given only when a telecom company pays Rs 15 crore as non-refundable entry fee as well as an annual License fee as a percentage of Adjusted Gross Revenue (AGR) service-area wise. The License fee shall be 8 percent of the AGR, inclusive of USO Levy which is presently 5 percent of AGR[28].

Thus, the Department of Telecommunication has issued many rules for applying the unified license mechanism on telecom service providers to implement the National Telecom Policy in a satisfactory manner.


 Consideration for Spectrum trading –

In order to cover the administrative charges incurred by the government, a transfer fee of 1% of the transaction amount of the trade or 1% of the prescribed market price whichever is higher would be payable by the buyer to the government[29]. The transaction amount would be exclusively decided by the buyer and the seller. The Spectrum Trading Guidelines are silent on whether the buyer and the seller can commercially decide to share the transfer fee. Further, sellers should be aware of the fact the guidelines mandated that the amount received as consideration for the spectrum trade will be included in the Adjusted Gross Revenue for the purpose of calculating license fees[30]; as such the amount of license fees could be considerably higher. An important question to be addressed is the tax liability of such consideration, whether liability would be for service tax or a state level value added tax or both thus bringing in the question of the tax treatment of telecom licensing in accordance with the new National Telecom Policy.

Unearthing the applicability of Indirect Taxation.

Indirect taxes are those that are borne in the first instance by one party and finally by another, i.e. impact and incidence is on two different parties to the transaction. Whereas impact is on the person paying the tax, incidence is on the final consumer of the good or service which is being taxed. The features of indirect taxes are:

(1)    Levied on goods and services sold by an intermediary to final consumers. Consumers than pay the tax in the form of higher price of items.

(2)    Broadly divided into categories such as sale of goods, imported/exported goods, offering of services and manufacture of goods.

(3)    Indirect taxes are levied on clearance of goods and services from the origin, instead of actual sale of the products to the customers. What this means is that the intermediary will pay excise duties irrespective of whether they could sell the good or service to consumers.

(4)    Indirect taxes fall under both the central and state governments according to specific type of indirect tax. For instance, VAT is levied by the state governments whereas CST is levied by the central government[31].

Indirect taxes are collected by the government on goods and services offered to final consumers. Sales tax, VAT, service tax etc. are all kinds of indirect taxation. This means that indirect taxes are applicable to spectrum buying and selling as well. What has to be determined is whether it is a good or a service in order to decide which of these indirect taxes would be applicable to it. Service tax is levied on services rendered for a compensation by the sellers of such services to the consumers and these are paid to the Central Government whereas VAT and sales tax is levied on the sale and purchase of movable goods and are collected by the government of the respective states[32].

The Annual Budget of 2016 was presented the tax liability for the sale and purchase of spectrum licensing was unclear and ambiguous. Several questions remained unanswered as a clear tax regime was not established. In the past, whether spectrum licensing was to be treated as a goods or service was a question of conflict. If treated as a good, tax liability would be towards Value Added Tax or Central Sales Tax and if treated as service, it would imply liability towards service tax but, since it wasn’t defined, there was no clarity regarding it.

In Tata Consultancy Services v. State of Andhra Pradesh[33], the Supreme Court held that tangible as well as intangible property would be ‘good’ if they consist of the following attributes:

  • Utility
  • Capable of being bought and sold
  • Capable of being transmitted, transferred, delivered, stored and possessed.

Since the introduction of spectrum trading, spectrum licenses are capable of being bought and sold and can be transferred and possessed and definitely have utility, so they may qualify as goods. If determined as a good, spectrum licensing ought to have a VAT or CST implication.

According to Section 4 of the CST Act, the situs i.e. location of sale should be the place/ State where the goods are located at the time of the execution of contract between the buyer and the seller, which would in turn determine where the tax ought to be payable[34].

Service tax on the other hand, is levied on any activity provided by one person to another for a consideration. Further, certain specified activities have been deemed to be services under a ‘declared list[35]‘. Transfer of right to use, by way of hiring or licensing, but which does not qualify as a ‘transfer of right to use’ (recognized as a ‘deemed sale’) is stipulated as a ‘declared service’. Thus, any activity which transfers the right to use, but does not qualify as a ‘deemed sale’, would fall within the ambit of a ‘declared service’, liable to service tax.

Thus, since licensing is the predominant method of giving access to spectrum, there is the question of whether it qualifies as a ‘declared service’ which remained unanswered until the Budget was presented this year by the Union Finance Minister who said “I propose to amend the Finance Act, 1994 so as to declare assignment by the government of the right to use the radio-frequency spectrum and its subsequent transfers a service, to make it clear that assignment of right to use the spectrum is a service liable to service tax and not sale of intangible goods[36].”

Thus, the perplexing scenario that existed before of whether licensing is a good or a service and whether it is to be subject to Vat or service tax was answered this financial year. This has helped eliminate tax ambiguity, dual taxation as a good as well as service, burdens of tax litigation sourced from such ambiguity and laid down a defined tax regime for telecom spectrum allocation and trading. A service tax of 14.5% has been proposed to be leviable on spectrum trading where it is treated as a service[37]. However, this decision is likely to increase the cost of the service as well as cause a cash flow issue to telecom companies[38]. But, the proposition of a CENVAT (Central Value Added Tax) credit, which is a credit in respect of central excise duty on inputs purchased for manufacture of the final product, will be available to telecom companies whereby they can avail the credit to discharge their service tax liability on their use of spectrum[39]. Also, not treating it as a good and subject to VAT helps by reducing tax burden on the ultimate consumer.


[1]‘Telecom Spectrum Allocation in India’http://www.indiatelecomonline.com/telecom-spectrum-allocation-in-india/ (27th March, 2010)

[2] Ibid.

[3] W.P.(C) 2954/2013

[4] WP(C) No. 6891/2015

[5]B.G. Mahesh, ‘What does allocation of Spectrum for Telcos really mean’ http://www.mahesh.com/mobile/what-does-allocation-of-spectrum-for-telcos-really-mean(27th November, 2007)

[6]AbhilekhVerma and Harsh Walia, ‘India: Department of Telecommunication Permits Spectrum Trading in India’ http://www.mondaq.com/india/x/431300/Telecommunications+Mobile+Cable+Communications/Department+Of+Telecommunication+Permits+Spectrum+Trading+In+India (1st October, 2015)

[7] (2012) 3 SCC 1

(accessed on 11th March, 2016)

[8] http://www.dot.gov.in/sites/default/files/u77/2015_10_13%20Trading-WPC.pdf(12thOctober, 2015)

[9] Point 4 of the guidelines to National Telecom Policy in October, 2015 issued by the Department of Telecom (DoT).

[10] Point 7 of the guidelines.

[11] Point 5 of the guidelines.

[12] Point 6 and 8 of guidelines.

[13] Point 8.

[14] Point 9 and 10 of guidelines.

[15]‘Spectrum Trading: Another Game Changing Reform in Telecom Sector’, http://taxguru.in/corporate-law/salient-features-norms-spectrum-trading.html( accessed on 9thSeptember, 2015)

[16] Snehashish Ghosh, ‘Licensing Framework for Telecom: A Historical Overview’ http://cis-india.org/telecom/resources/licensing-framework-for-telecom

[17]Snehashish Ghosh. ‘Telecom Policy 2012: Issues and Concerns’, http://cis-india.org/telecom/national-telecom-policy-2012

[18]PrsIndia, ’National Telecom Policy 2012’ ‘http://www.prsindia.org/theprsblog/?p=1705 (2nd July,2012)

[19]‘Salient Features of National Telecom Policy,2012’ http://pib.nic.in/newsite/PrintRelease.aspx?relid=93289 (83th March, 2013)

[20] Supra (footnote 16).

[21] Ibid.

[22] Ibid.

[23] http://pib.nic.in/newsite/PrintRelease.aspx?relid=93289

[24] http://www.dot.gov.in/licensing/unified-license

[25] FP Editors, ‘DoT issues new guidelines for Unified Licenses, bans cross-holdings by telcos’ ://www.firstpost.com/business/dot-issues-new-guidelines-for-unified-licenses-bans-cross-holdings-by-telcos-1006609.html (2nd August, 2013)

[26] Ibid.

[27] Ibid.

[28] http://dot.gov.in/sites/default/files/Unified%20Licence_0.pdf

[29] Point 24 of guidelines to National Telecom Policy issued in October, 2015.

[30]Supra (footnote 13).

[31] https://www.bankbazaar.com/tax/indirect-tax.html

[32]Karan Batra, ‘7 Types of Indirect Taxes in India and its Meanings’, http://www.charteredclub.com/indirect-tax-gst/

[33] (2005) 1 SCC 308

[34] http://www.taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php3&newsid=24988

[35] Ibid.

[36]‘Analysts Laud Clarity on tax for spectrum trading’, http://www.thehindubusinessline.com/economy/budget/analysts-laud-clarity-on-tax-for-spectrum-tradingsharing/article8296630.ece (29th February, 2016)

[37]‘Budget 2016:Sevice Tax of 14.5% on Spectrum May Prove Negative for Telcos’, http://www.business-standard.com/budget/article/budget-2016-service-tax-of-14-5-on-spectrum-may-prove-negative-for-telcos-116022900560_1.html ( 29th February, 2016)

[38] http://telecomdrive.com/budget-2016-coai-welcomes-the-move-to-clarify-spectrum-trading-as-a-service/ (29th February,2016)

[39]SudiptaBhattacharjee, Tuhina and Raj Singh, ‘Indirect Taxation of Spectrum Trading-Dawn of a New Quandary’ http://www.idt.taxsutra.com/experts/column?sid=184 (5th November, 2015)


Sushmita Sekhar,

3rd yr B.A.LL.B (Hons),

Hidayathullah National Law University,


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Disclaimer:  The views and opinions expressed in this article are those of the authors. All data and information provided on this site is for informational purposes only. sapaa.in makes no representations as to accuracy, completeness, correctness or validity of any information on this site and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use.