The Telecom Regulatory Authority of India (TRAI) has issued a consultation paper seeking to levy adjusted gross revenue (AGR)-based spectrum usage charge (SUC) on internet service pro­viders (ISPs) in the country. Currently, the regulator levies an annual charge on ISPs based on a formula that takes into account a number of factors such as carrier bandwidth, maximum distance over which the wireless network operates, number of frequencies, number of carriers, etc. How­ever, the sector regulator now proposes to bring the SUC imposed on ISPs under the revenue sharing model, similar to the method followed for wireless telecom service providers.

Need for spectrum

ISPs offer internet access to their customers, both residential and enterprise units. Typically, traffic carried by ISPs rides on an IP backbone. In most cases, optical fibre is used in the backbone network. However, the last-mile solution in an access network is either a wired me­dium (copper or optical fibre) or a wireless medium. Over a period of time, optical fibre has evolved as the most practical solution for both access as well as backbone networks. Owing to its almost limitless capacity and scalability, it is the ­preferred choice for high capacity routes where the potential revenue gain offsets the expense. However, deploying fibre to every house is practically not feasible due to cost and logistical challenges. Hence, ISPs use the wireless medium for providing last-mile access connectivity to their subscribers, particularly in those areas where laying of fibre is not feasible either due to the difficult terrain, time constraint, or economic viability. For enab­ling wireless connectivity in the last mile, ISPs require spectrum.

While spectrum is allotted to wireless telephony providers through auction, it is assigned administratively to ISPs. The Department of Telecommunications (DoT) is tasked with assigning spectrum to ISPs on a city-wise basis, subject to its availabil­ity, and renewing it on an annual basis.

Evolution of the ISP licensing regime

The licensing regime for ISPs has undergone several changes over the years. Recognising the critical nature of internet services, the government opened up the sector to private operators in November 1998, and a liberal licensing regime with no entry fee and licence fee, and an un­limited number of players were put in place. Further, DoT did not impose any financial implications in the form of licence fee till October 2003, and imposed only a token licence fee of Re 1 per annum after that.

The ISP licence agreement was amended in March 2006, under which a licence fee of 6 per cent of the AGR was made applicable. The AGR included reve­nue earned from internet telephony but excluded revenue from internet access and internet content. In June 2012, the government decided to levy a uniform licence fee of 8 per cent of AGR on both ISP and ISP with internet telephony licence.

The most significant change in the licence regime for internet services came with the issuance of unified licence (UL) guidelines in August 2013. As per the guidelines, service providers are required to pay an entry fee along with a service-area wise annual licence fee, which is a percentage of the AGR. However, ISPs are assigned spectrum administratively and as such, the SUC applicable to them is based on a formula. According to an estimate, ISPs currently pay about Rs 350,000 per year for 5 MHz of spectrum.  More­over, spectrum is assigned not on a city-wise basis (as required by DoT), but on a link-by-link basis, making spectrum management complex.

Issues raised in the consultation paper

In its latest consultation, the regulator has sought comments from stakeholders on whether there is a need for introducing SUC based on the percentage of AGR for ISPs or should the existing formula-based spectrum charges continue. Under the proposed arrangement, SUC will be calculated as a percentage of AGR based on the amount of spectrum held along with the minimum floor level AGR or the minimum presumptive AGR. Currently, there is no such presumptive AGR defined for ISP licence holders.

The above proposal is based on the rationale that since ISPs have been brou­ght­ under the UL regime, they should also be brought under the revenue sharing regime to ensure similar regulations for all players. Moreover, AGR-based spectrum charges are simple to implement, as opposed to the current link-to-link basis charges, which are relatively complex for the government and ISPs as the number of links vary in a dynamic manner.

The other related issues raised by TRAI in the paper are as follows:

  • If AGR-based SUC is introduced, should the percentage of AGR be uniform for all ISP licensees or should it be different, based on revenue or spectrum holding or any other suitable criteria.
  • What mechanism should be devised for the ISP licence to identify revenue gene­rated from the use of spectrum and revenue generated without the use of spectrum?
  • In case the minimum presumptive AGR is prescribed for the ISP licence, what percentage should be applied on the minimum presumptive AGR to compute SUC.
  • In case formula-based SUC for ISP licences is to be continued, should there be any changes in the formula being currently used.

Apart from amending the SUC regime for ISPs, the regulator has put forward a proposal to amend SUC rules for very small aperture terminal (VSAT) licence holders as well. As per the current licensing regime, a VSAT licence is granted for a period of 20 years to applicants to esta­blish, install, operate and maintain VSAT closed users group (CUG) domestic data network service via the INSAT satellite system. Currently, commercial CUG VSAT operators are levied a licence fee of 3-4 per cent of AGR, based on the data rate they offer. The government wants to bring in VSAT operators under the revenue sharing regime and has sought stakeholders’ views on the methods of computation of the presumptive AGR for such players.

Industry concerns

While the above move is aimed at bringing administrative clarity, it has wide-ranging repercussions for ISPs, especially smaller players. The industry is of the view that any change in the existing SUC regime will have a cascading effect on reve­nues and lead to an increase in the cost of delivering broadband. Moreover, it might also hamper the plans of various players that are in the process of laying down infrastructure for expanding their services.  The increased cost of service provision will ultimately be borne by the end-consumer, hampering their uptake.

The industry is of the view that any change in the existing SUC regime will have a cascading effect on revenues and lead to an increase in the cost of delivering broadband.

The industry is also concerned about whether the presumptive AGR will be calculated on the basis of their overall revenue or the revenue generated from the use of spectrum. While the paper recognises that a proper mechanism is required for clearly segregating the revenue genera­ted from the use of spectrum and revenue generated without using spectrum, arriving at such a mechanism will require in­dustry consensus.

One of the biggest challenges that the telecom industry of the country currently faces is that broadband penetration is still quite low, especially in rural areas. While the government has committed itself to improving broadband connectivity in the country through initiatives such as Digital India and BharatNet, it is essential that the government and industry work to­gether in making affordable internet services available to all.