Context

Unified Licensing policy 2012 separated spectrum and license prices. Spectrum would be auctioned to Mobile telephony operators only. For all telecom-related services license 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

Resulting Scenario

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

Disclaimer

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 dev.baul@gmail.com  for  further exchanging of notes.