Telecom Apocalypse in India 2020
Unified Licensing policy 2012 separated spectrum and licence prices. Spectrum would be auctioned to Mobile telephony operators only. For all telecom related services licence fee would be charged @8% of Adjusted Gross Revenue. Adjustments being in the nature of taxes and pass through charges paid off to other network
We explore two specific points that we believe have escaped scrutiny in the spate of current commentary on the issue.
1. Absurd interpretation of what constitutes “Adjusted Gross Revenue”
Revenue of a telco accrues from its core telecom based operations and other income from rentals, treasury operations etc. Most analyses by industry experts/journalists have flagged off inclusion of ‘other income’ as the precipitating factor for this huge licensing fee demand. “Other Income” may be one of the causes but definitely not the main cause. Operators like Airtel and Vodafone would have factored this in and minimised the effect of ‘other income’ in their P&L.
It is the interpretative definition of ‘core income’ that is causing the heartburn. It is our hypothesis that telcos calculated their licence fee liability as a percentage of their realised revenues after setting off cash and dealer discounts. Cash discount is the difference between TRAI prescribed price and the telco offer/plan price that the customer actually pays. Given the price levels prevailing today, cash discounts are very high. As against this, the Government is calculating the licence fee payable as a percentage of the TRAI prescribed!! It is like selling a Rs 100 service at a 40% discount for Rs 60 and then paying a licence fee of Rs 8 ( 8% of notional revenue) instead of Rs 4.80 (8% of actual revenue)!!
To give another analogy, if a similar licence fee regime is imposed on the hotel industry, they would have to pay licence fee as a percentage of their rack rates and not at the rates at which the rooms are let out. All of us know that not a single room is let out at rack rates
It is this difference in the interpretation of the liability that started with a couple of thousand crores and has now snowballed into 50+K crore millstone. Telcos kept on paying licence fee based on real revenues and hoped for a quashing of this absurdity of licence fees based on notional revenues
2. Selective application of the law amongst the mobile operators
In 2016, Jio launched its 4G services and gave it free (100% cash discount over TRAI prescribed price) for nearly a year. In the process they got around 50 Cr customers and became the No 1 Telco. No revenues accrued as services were given free and thus no licence fee was payable except a minimum fee based on a presumptive AGR. It may be noted that concept of licence fee based on a percentage of the TRAI price(notional price) was not applied in Jio’s case !! Government was deprived of licence fee from Jio based on 8% of notional revenue from 50K customers. The figures are not exact but are in the ball park.
Jio also gave free handsets to customers against an interest free 3 year deposit of Rs 1500. This implied this was not revenue and thus no licence fee was payable. It was a triple whammy for the government
- No licence fee accrued for the first one year of operation
- No GST/Sales Tax revenues as there was no sale of handsets
- Lesser Income tax as all handset purchases were expensed off as sales promotion expense in the P&L
In light of Vodafone’s deposition to the SC stating their inability to pay and BSNL defaulting on salary payments for last six months it is abundantly clear that we are going back to a monopolistic or at best duopolistic market. We will be moving to a fifth generation technology in a first generation market with the attendant monopolistic market malaises. TRAI’s task will be made simpler as the incumbent cartel of two will decide on the prices. Having experienced the BSNL-MTNL services with QoS of high tariffs and procurement/repair time , it will be interesting to see how this hegemony unfolds
Conclusions and surmises arrived at in this write-up are predicated on information available in public domain. References are not cited for ease of reading and the fact that this is more of an RFC document purporting to throw open the debate. Interested may write to email@example.com for further exchanging of notes.