GST Course

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Background

An increase in the minutes of usage (MoU) compensates for the decline in tariffs, thereby contributing to healthy revenue growth. India has one of the highest minutes of usage (MoU) per subscriber per month, at more than 400 minutes1. Till mid-2020 decade, telecom companies enjoyed the credence that - You can only profit fat when its telecommunications.

Well, the industry turned out to be whimsical from being credent. And the honour for what is so far considered to be the biggest sectoral disruption went to Mukesh Ambani's Reliance Jio. Jio's entry contorted anything and everything related to telecommunications. From user- base, tariffs to network quality - everything went up notches higher; and nothing seemed to be done serendipitously. Telecom companies and users were looking at the situation with incredulity. And for telcos, Jio was insurmountable. When Indian telcos were gnawing and bleeding due to merciless tariff war; they were unaware of outcomes of inherited policy paralysis.

The Government of India in 1999, offered an option of revenue sharing model to licensees against the steep fixed license fee fixed under the National Telecom Policy, 1994. Under revenue sharing model, licensees had to pay following to the GOI -

Telecom Crisis and the way ahead

i. Annual License Fee (being 8% of AGR2); and
ii. Annual Spectrum Usage Charges (being 3-5% of AGR).

Introduction

AGR as per DoT3 included all revenues, both arising out of telecom and non-telecom services. Well, everyone at telcos along with their solicitors were novices not to notice such an imprudent definition at the time of signing! DoT notices pinched them; as a result, COAI in 2005 frenetically challenged the definition of AGR. And one and a half decades down the line, we are on the cusp of settling the issue (although resulting in bankruptcy of an Indian unit of a multi-billion dollar MNC).

The AGR definition issue

According to the revised revenue sharing policy of 1999 - For instance, if a telco had earned annual service revenue4 of INR 1 crore, it had to pay INR 10 lakhs to the GoI as Annual License and Spectrum Usage Charges. This has been undisputed from both the ends.

However, if a telco has any other operating or non-operating income, the Revenue Sharing Policy of 1999 requires the telco to pay Annual License and Spectrum Usage Charges on that also. This pinched the telcos and rightly so, that they should not be required to pay any license or spectrum usage charges on non-service revenues like - interest income, capital gains on sale of offices, etc. However, this was embedded in black and white in the agreements between DoT and telcos. This eventually empowered the DoT to raise claims of annual charges on non-service revenues as well. The DoT accordingly, in the interest of the exchequer, raised claims of annual charges on non-services revenues of telcos which as anticipated, ignited the legal tussle which ended up knocking the doors of the Apex Court.

Concisely, the issue that has cropped up is should AGR include only service revenue of telcos or non-service revenue as well for payment of annual license and spectrum usage charges?

The Supreme Court upheld the claims of the DoT based on the definition of AGR laid out in agreement which included all the revenues. The decision not only has severe repercussions on the operating telcos but also other PSUs who had obtained telecom licences like GAIL (India) Limited, Oil India Limited and Power Grid Corporation of India Limited. These PSUs have been served with notices to pay annual charges on their entire annual revenues! Yes; sounds insane, but has been upheld by the Supreme Court of India. For instance, GAIL has been asked to pay INR 1.83L crores even though its business is of Natural Gas Processing and Distribution.

As per the present claims of the DoT as upheld by the Apex Court, Bharti Airtel owes around INR 35k crores of which they have paid up INR 10k crores; whereas Vodafone-Idea owes around INR 53k crores of which they have paid up around INR 2.5k crores. Since these dues were not provisioned, it has resulted in distressed financials of these telcos and Vodafone-Idea is on the brink of insolvency due to these claims.

Vodafone-Idea Financial Position

Vodafone-Idea combined has a total debt of INR 1.26L crores apart from AGR dues. There is no sign of recovery in the sector due to the ongoing tariff war coupled with requirements of additional investments for improved services. This has raised several questions on solvency of the second largest telecom player in India. The AGR liability is expected to be met in the following manner -

 

Sr. No

Particulars

Amount (in INR k crores)

1.

Cash and Cash equivalents

12.53

2.

Support from Vodafone Group Plc

8.50

3.

Potential sale of 11.15% Indus Stake

3.50

4.

Total

24.53

Vodafone-Idea have currently provided only for INR 24.53k crores as against total claims of INR 50.5k crores. With mounting debt and no clear indication of revival it will be very difficult to raise debt. Even if it managed to pay the dues somehow, it will be left with no room to invest in ramping up networks or buy more spectrum to improve the quality of service. At the same time, the subscribers will be asked to pay more so that the operator can recover the investments made for meeting regulatory payments. Neither of these scenarios augurs well for a country that is embarking on an ambitious digital journey.

Also, promoters, Aditya Birla Group and Vodafone Plc, have indicated that they would not be investing more money into the telecom joint venture.

What if Vodafone-Idea fails?

It is estimated Vodafone Idea debt at INR 1.26L crores, of which INR 90.7k crores are in the form of deferred payment liabilities and guarantees towards spectrum charges payable over 16 years. Fortunes of banks and investors are at peril. Event DoT might have to write-off its claims. The negative sentiment in case of default will create hurdles for other Indian Companies to raise finance. Banks have already started provisioning.

In a duopoly scenario, Airtel and Jio might bargain hard and get the government to auction Vodafone-Ideas spectrum at a significant discount by getting it to slash the reserve price. Apart from this, investors wealth has been eroded to the extent of 95%. Also, jobs of around 13,500 employees is at stake.

From 24 Private Players in the telecom industry might shrink to only 2 Private players and the consumer will be the biggest loser in the absence of adequate competition. Moreover, role of Competition Commission of India (CCI) can also be questioned. If CCI were sceptical of Amazons and Alibabas; well, there does not seem to a reason to take eyes off telcos tariff warfare.

Will anyone gain from this debacle?

If Vodafone Idea was to exit the industry, then the competition is likely to come down by many notches and is likely to result in higher prices for the consumers and a likely monopoly situation led by Reliance Jio.

Also, almost one-third of the subscriber base (around 336 Million) will be distributed between two of the major telcos, Bharti Airtel and Reliance Jio.

Way ahead

With interest of so many stakeholders at stake, it is expected that Government may interfere. GOI in consultation with various representatives from DoT, NITI Aayog, Ministry of Finance, DCC have proposed various steps to help telecom companies to come out of this turmoil.

1. The Government has asked to expeditiously refund telecom companies of excess GST input. The sum of input currently stands at INR 36k crores. Vodafone-Idea claims that it has input credit to the extent of INR 8k crores. Government has also proposed to reduce GST Rates on Telecom Equipment and Service from existing 18% to 12% so that cash flows are not stuck in Input credit. However, this will require approval of GST Council and can take time.

2. Government is also considering slashing the levy on the Universal Service Obligation (USO) from 5% to 3%.

3. Government has sought legal opinion of granting loan to the extent of INR 50k crores to bail out Private Telecom Companies from USO Fund.

Conclusion

Adam Smith, the father of modern economics, wrote that the best economic benefits for all can usually be accomplished when individuals act in their self-interest.

As Vodafone-Idea faces crisis paying its AGR dues, what course of action would be in the GOI’s best interests? To let telecom firm Vodafone-Idea go into liquidation or is there an alternative?

Government has already declared INR 70k crores package to revive BSNL. With GOI putting in all its muscle to meet fiscal targets difficult to meet, each department has its own agenda and it will hence be interesting to see, what best alternative is there on offer.

The authors can also be reached at utsavmilanshah@gmail.com and doshiviren@live.com

1. Report on telecommunications sector - IBEF 2010
2. AGR stands for Adjusted Gross Revenue
3. DoT stands for Department of Telecommunications which comes under the Ministry of Communications
4. Service Revenue is revenue on account of telephony services (postpaid and prepaid categories, roaming, interconnect and long distance services


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