There is ongoing tussle between telcos and government for their licence fee settlement. Union budget and the Supreme Court’s recent decision talked about not providing relief to telcos.
- The Supreme Court decided the matter in favour of the government even though there were signals in the run-up to the verdict that it might waive the accumulated interest and penalty on the unpaid licence fee as per some estimates 75 per cent of the AGR dues are on account of penalties, interest and interest on penalties.
- The Union Budget 2020 waived penalty and interest charges on disputed tax liabilities if these are paid by March 2020.
Adjusted gross revenue (AGR), the main issue of debate
- Since the New Telecom Policy of 1999 (NTP 1999), operators were required to pay a percentage of their AGR to the government as licence fees.
- This was done in exchange for moving operators from fixed licence fee based on irrationally exuberant bids they had made in the mid-nineties to a regime that determined licence fee based on revenue earned, thereby de-risking the obligation.
- Telcos, on their part, insist that AGR should comprise only the revenues generated from telecom services.
About adjusted gross revenue (AGR)
- The AGR is divided into spectrum usage charges and licensing fees, pegged between 3-5 percent and 8 per cent, respectively.
- As per DoT, the charges are calculated based on all revenues earned by a telco, including non-telecom related sources such as deposit interests and asset sales.
Unresolved problems with respect to AGR
- Ambiguity regarding non-telecom revenues to be treated as revenue under the license.
- Uncertainties regarding whether handset sales will also come under the purview of AGR. Handsets are part of the service offering. But, now, interest and dividend earnings on investments have also been included in AGR.
- Ever since the private entry was allowed in the sector, it has been peppered with controversy and litigation. The creation of the telecom regulator itself lies in the non-transparent bidding process of 1995.
- Among the transparency-related issues was a post-bid decision by the department of telecommunications (DoT) to impose a cap on the number of licences that could be awarded to one bidder. The rules were changed ex-post and smacked of bias.
- The fateful start in telecom proved a bad omen. Litigation has been relentless, matched only by the increasing capital requirements due to the frequent introduction of new generation technologies.
- After the incessant litigation and confrontation, the government dissolved TRAI in 2000 and later assigned its quasi-judicial powers to a telecom disputes tribunal to fast track settlements and bypass overcrowded courts.
- In 2003, “limited” mobility service was converted into a fully mobile service with a one-time payment as “conversion” charges, generating controversy. It was labelled as a “back door entry” to full mobility.
- Around the same time, the DoT used to levy a fee of Rs 4.75 per minute on international calls known as “access deficit charge” (ADC) to fund universal coverage. It is well known that an operator disguised international calls as domestic to bypass ADC.
- For some time, internet services attracted lower or no licence fee and it became expedient for operators to indulge in license fee “arbitrage” by showing more revenue from internet services.
- Another manoeuvre was to inflate subscriber numbers to gain access to scarce spectrum in the days when fresh spectrum was administratively assigned based on subscriber numbers.
- And finally, was the battle fought by operators to jump the queue to deposit earnest money for gaining rights over the spectrum that was oddly sought to be assigned by a method called “first come first served. The definition of this was quite elastic.
- Thereafter, in the litigation that inevitably followed, the Court cancelled 122 telecom licences and mandated allocation of spectrum by auction.
- In their eagerness to influence policy and compete, operators have regrettably sullied their reputations in the interest of short-term gains. But the government cannot completely absolve itself.
- Erosion of trust between the public and private sector in general and in the telecom sector, in particular, has been a negative externality of the reform process. Trust deficit spreads risk aversion within the system and the telecom sector today is paying the price of its own indiscretions.
- The recent happenings paint operators, public and private, in poor light. Being a highly capital intensive sector, implications of policy decisions are large scale.
- The appeal made by the finance minister during the budget speech for the restoration of “Vishwas” between the public and private sectors and between citizens and government is critical for the way ahead.