Why the SC Verdict on Adjusted Gross Revenue Does Not Validate Indian Telecom Licensing Regime

It is time to abandon the logic of telecom levies on operator revenues.

On Thursday, the Supreme Court, settled a 15-year-old dispute between the government and incumbent telecom companies including Airtel and Vodafone Idea. The companies had disputed payments claimed by the government on account of licence fees and spectrum usage charges (SUC).

The court has ruled against them and has, in effect, asked them to pay the government over Rs 1.3 lakh crore including the original demand, interest and penalty charges. The judgement means a massive windfall for the government, but it might be unwise to rejoice.

The dispute related to the so-called Adjusted Gross Revenues (AGR) of mobile operators. This AGR refers to operator’s total revenues minus permitted exclusions. An operator’s licence fee and SUC are defined as a percentage of its AGR and are currently 8 per cent and 3 per cent respectively.

The permitted exclusions mentioned above refer to revenues that an operator passes on to another operator in the form of interconnect usage charges and roaming payments. Mobile players have long contended that such exclusions should also include all other revenues unrelated to their telecom business like income from investments, or rents from real estate etc. The government i.e. the Department of Telecommunications (DoT) disagrees and argues that the licence agreement signed by the operators leaves little room for this interpretation. The Supreme Court has upheld this.

Also read: Jio, Airtel, Vodafone Slash Ring Time to 25 Seconds

The sum due from the operators is daunting. It is more than half of the telecom sector’s total revenues today. At present, the sector is also reeling under a debt burden of over Rs 7 trillion. There has been a steep fall in revenues and profitability of incumbents in recent years. There are frequent reports of the precarious financial health of Vodafone Idea. The impact on the companies is bound to be severe.

It is unlikely that the government can waive or reduce this liability. DoT has a legendary focus on exchequer revenues. This is evident not just from its pursuit of the present case, but elsewhere too. DoT has insisted on high reserve prices in spectrum auctions and retained SUC even after abandoning administrative allocation of spectrum.

However, it must worry. The massive new liability of operators and their reduced ability to raise debt, will dampen the already low interest in the 5G auction that the government is keen to hold. This could cause potential delays and hurt exchequer revenues. Besides, the losers would also be India’s users and the digital ecosystem that increasingly depends on telecom services.

Also read: After Contentious Delay, DCC to Decide on Rs 3,000 Crore Penalty for Airtel, Idea and Vodafone

The Supreme Court judgement is no validation of the current licensing regime per se. The court has undoubtedly upheld DoT’s interpretation of telecom licences. However, this does not imply that the licence is a particularly smart document, in line with the needs of the times.

The current approach of computing government fees as a proportion of AGR is akin to a telecom tax. It provides little incentive for efficiency or introduction of new technologies: For example, a company that has better revenues because of its efficiency or better technology would pay more while one that uses spectrum inefficiently, deploys poorer technology and generates less revenues for itself ends up paying less. It is high time we abandon the current practice of basing telecom levies on operator revenues.

By arrangement with Business Standard.