In a move aimed at removing the arbitrage possibility available at present to integrated operators, the government is looking to move away from a variable licence fee structure to a uniform levy regime. A DoT committee has recommended a uniform fee of 8.5 per cent of adjusted gross revenue (AGR) for all telecom licence holders. The move has attracted a mixed response from various telecom lobbies. Industry experts discuss their views…
What is your view on the government’s proposal to impose a uniform licence fee on all telecom operators?
Rajesh Chharia: The government’s objective of imposing a uniform levy on all telecom operators is to remove litigation, which is good. But in doing so, what is happening is that the government is including the internet also in the ambit of telecom, which is an absolutely wrong step.
Internet infrastructure is not a part of telecom and that is why we, ISPs, have, from the very beginning, been facing the consequences of the integrated operatororiented regime. Till date, we have not been able to achieve our broadband targets and now, with the government coming up with this rule, the situation will deteriorate further. The Indian consumer is highly price sensitive. An 8.5 per cent levy will lead to tariffs going up, with the end result being that broadband penetration will suffer. Just to benefit some of the top telecom majors, the government will be harming the majority of other operators, especially the standalone ones.
T.V. Ramachandran: The uniform licence fee is a welcome step. The Cellular Operators Association of India (COAI) has wanted this uniform fee for all operators for quite some time now.The move, when implemented, will cover not just mobile and fixed line operators but also those with licences for national and international long distance services and internet access services. This will help prevent any arbitrage opportunities.
For two to three years now, we have been suggesting a uniform charge of 6 per cent. In its budget recommendations for 2009-10 as well, the COAI had called for a uniform licence fee of 1 per cent of AGR, excluding the 5 per cent Universal Service Obligation (USO) Fund charge.
Romal Shetty: Over the past three years, the telecom business has come under significant scrutiny from government authorities over its contribution to the government budget. Being a high-growth industry has become a disadvantage as there is increasing focus from the government to make telecom a key revenue spinner.
The proposal to make the licence fees uniform across the entire sector can bring in some simplicity to the increasingly complex regulation, fees and tax regime.However, a uniform fee would disturb the status quo as many operators have found ways and means to decrease the impact of the fee. A number of such cases have been publicised by the media. The government audit of large telecom companies must have brought forth many more issues.
Mahesh Uppal: It is a very good idea, but with all the wrong details. In fact, its basic logic is undermined by the details accompanying it. There is no reason why we should have different fees for different services, as this leaves scope for arbitrage. In such a system, there is an incentive to fudge revenue numbers, and this is what the government is concerned about. The way to do this, however, is to separate the government’s goal of maximising revenue from the licensing regime.
All markets are open in India, so imposing such a heavy licence fee is not really justified. In most other countries, the licence fee is virtually zero. Most licences are available off the shelf, except for spectrum which comes for a fee. Unfortunately, in India, we still continue to have licence fees for all services.
What are the advantages of implementing a uniform fee?
Rajesh Chharia: The only pros are for the government. Itwill not have to calculate different levies on different services. Multiple levies have led to some operators with multiple licences taking advantage of the differential fees and showing higher revenues under the licence with lower revenue share. A uniform licence fee will prevent them from doing that.
T.V. Ramachandran: For the government, a uniform licence fee of 6 per cent will not lead to any reduction in revenue, since tariffs will drop further and volumes will rise. However, the government has proposed to keep the levy at 8.5 per cent because that is the weighted average of what it is currently earning. While I do not blame the government for this figure as, in the current financial crisis situation, it needs to deal with national issues like drought and fiscal deficit, I do wish it had kept it at 6 per cent.
But still, the principle of a uniform licence fee itself is important. It will help in the administration of revenues by the government and also ensure fair competition.
Mahesh Uppal: The government is motivated by the fact that it will reduce incentives for arbitrage and fudging. This would ensure that companies are not able to transfer revenues from one service with a higher licence fee charge to services that attract lower fees. However, given the way the Indian tax system works, it really needs to be seen how a uniform licence fee helps.
How will the move impact various stakeholders such as ISPs, mobile operators and long distance service providers?
Rajesh Chharia: The result of this ruling, if applied, would be that penetration will suffer, especially in Category B and C circles, as they largely comprise low-end users. On the one hand, the government wants tariffs to fall further, and on the other, it is hiking the tax burden on some players.
ISPs and all telecom operators in Category B and C circles will face a disaster. Only two to three operators who are present in the metro and Category A circles will benefit.
T.V. Ramachandran: The uniform licence fee will help avoid arbitrage over integrated operators allegedly loading up maximum revenues on licences with lower fee. At present, operators pay between 6 and 10 per cent of their annual revenue to the government as licence fee, depending on the type of service. This allows operators with multiple licences to take advantage of the differential fees and show higher revenues under the licence with the lowest revenue share.
Romal Shetty: However, some of the players in telecom segments such as ISP, national and international long distance operators are unlikely to be inclined to pay a higher fee.
In every other industry and economy, taxes and fees are being rationalised to make it easier for industry to comply with the norms, and for the governments to track and audit companies effectively. This uniformity is essential for all stakeholders.
However, with such initiatives, governments across the world tend to overshoot the existing levels of taxation. It would be naive to imagine a lower licence fee rate. In all likelihood, given the government’s current fiscal situation, the overall licence fee rate can be expected to be considerably higher.
Most Asian countries charge annual licence fees at less than 7 per cent of revenues. It is not possible to assume a rate lower than 8 per cent. Except for the large pan-Indian mobile operators, smaller operators including the new players and companies in other subsectors are unlikely to applaud this move.
Mahesh Uppal: Other than the mobile business, sectors like long distance and ISPs, for which the licence fee was brought down from 15 per cent to 6 per cent, will now have to pay a licence fee of 8.5 per cent. Most companies are going to resent this move as it really hurts their business case.
Moreover, if revenues are increasing, the government should be satisfied with a licence fee of 6 per cent. Otherwise, one is actually hurting the smaller companies that are operating on a relatively lower margin.
The licence fee hike will not impact tariffs. This is because the largest ISP, that is, Bharat Sanchar Nigam Limited will continue to charge a lower price. Therefore, in order to remain competitive, other operators will also have to keep their tariffs at the same level. The consumer will be impacted in the long run, because the higher fee will affect service rollout.
What are the likely roadblocks in implementing a uniform licence charge?
T.V. Ramachandran: The biggest challenge would be in avoiding any duplication of taxes. For instance, if the levy is applied on one of the parties, like tower companies that are providing services to an operator, the latter should be able to set it off from its own revenues. In other words, a “pass-through” should be allowed and it should not become a double levy.
Romal Shetty: Over the past three years, telecom companies have focused on making their operations leaner through outsourcing key operations and assets. Tower companies have been formed to take care of specific passive assets, and IT functions such as billing and network operations have been outsourced extensively. Whether such operations constitute a telecom service is a point that needs to be assessed further, as many of the outsourcing operations are spin-offs and many operators actually earn additional revenues from outsourcing, especially in the tower business.
Mobile operators are on a steady growth trajectory and have factored in such fees. However, the ISPs are unlikely to appreciate their inclusion in such a uniformity drive. Further, with the government’s focus to drive up broadband usage, the application of such a fee may be detrimental to the pricing of broadband services.
Mahesh Uppal: I expect opposition and lobbying from all industry associations except mobile operators. The only people likely to benefit are operators in the metros and Category A circles, as for them, a uniform fee of 8.5 per cent is lower than the current 10 per cent. Almost everyone else will be hurt by this fee level.
