Pleased, but not satisfied, with the government’s decision to reduce the revenue share by 2 per cent, telecom service providers now want a change in the definition of adjusted gross revenue (AGR) to exclude non-telecom revenue streams. What is a fair method for computation of licence fee? Is the operators’ demand justified? Sector experts give their perspective…..

Telecom service providers have asked DoT to modify the definition of AGR used for calculation of licence fees to exclude revenue streams unrelated to their service activity. What are your views?

S.C.Khanna
Telecom service providers are paying licence fee as a percentage of the AGR to the government. The present definition of AGR suffers from some serious infirmities, creating problems that have assumed a significant magnitude as service providers roll out their networks and register an increase in revenues every quarter. This problem runs across all telecom service providers who are governed by the licence to pay licence fee as a percentage of revenue earned. The definition has in practice included revenues from streams that are unrelated to the licensed service activities on the one hand while on other, it does not allow for deductions for costs incurred in earning such incomes/revenues.

Usha Rajeev
Licence fee is a generic charge for the right to operate and provide telecom services. Hence, by definition, a licence fee that is based on a revenue share would need to be based on a share of the “relevant” revenues only, which in this case is telecom service revenues. Including other income streams accruing to an operator, namely, interest/investment income; rental income, etc. that is not related to the provision of telecom services will be akin to a generic tax on gross income, which is not the stated intent ore revenue share licence fee.

Mohit Saraf
In determining revenue streams for the purpose of calculating the licence fee, the “benefit of the licence” test must be used as the guiding principle. That is, all revenue that accrues to the licensee as a benefit under the licence and which directly or indirectly arises out of the licence must be captured under the heading of AGR. Such a definition would satisfy the telecom service providers as being a fair and equitable method of defining the AGR. The current definition of AGR would fail the “benefit test” since it mandates the inclusion of revenue streams that are unrelated to providing telecom services. A definition of AGR that recognizes the aforesaid principle would appear to be both commercially prudent and fair.

The government must not take an overtly rigid stand on amending the licence agreement. It is time for the government to recognize that extending reasonable commercial concessions to telecom companies would encourage investment in and growth of the entire telecom sector. Sometimes, address private interests helps achieve public interest – and this appears to be a case in point.

Mahesh Uppal
I think it is a good idea. The more clear and limited the obligation, the more attractive it would be to service providers, and the easier it would be to administer. It would provide incentives for creative marketing, including bundling telecom services with a variety of telecom and non-telecom services.

At present, the definition of AGR does not allow for deductions on account of bad debts, waivers/discounts to subscribers, roaming charges, etc. Should the definition be changed to allow for these deductions?

S.C.Khanna
The definition includes several revenue streams unrelated to licensed activities such as income from interest and dividend, revenue from sale of capital goods, revenue from sharing/leasing of infrastructure, and does not allow deductions for bad debts, waivers/discounts to subscribers, port charges, leased line charges paid between operators and hence are double payment. It is violative of established principles that if any income is charged to a tax, the underlying expenses incurred related to that income should be allowed as a deduction. The definition also does not treat income from interest/dividend, etc. unlike non-operational income as institutions/authorities such as the Institute of Chartered Accountants of India. Therefore, the AGR should exclude income from the following:

• Interest and dividend

• Sale of assets

• Any other income accruing to the licensee by way of operations other than the licensed telecom operations

• Port charges, leased line charges or any other charges such as those of space, and rent paid to other licensed operators to avoid double payment.

Usha Rajeev
Revenue “share” licence fee implies that the intent of this is that the licensor obtains a share of the “revenue” generated by the operator by operation of the licensed services. The concept of matching costs with revenues requires that the revenue accrues to the operators for a “share” of cost to arise. Discounts/Waivers to customers in today’s scenario are generally agreed upfront with customers as per contracted bill plans based on selected schemes/volume of traffic. In such cases, only the revenue net of such agreed discounts accrues to the operator.

In the case of service tax, this is deposited by operators to the extent of revenue collections, which is net of bad debts. On the same principle, bad debts that are not collected by the operators should not be subject to levy of revenue share licence fee.

Mohit Saraf
Each of the claimed deductions would attract different considerations. A central concern would, however, be that of perspective – should a deduction be viewed purely from a revenue perspective or from a commercial perspective?

For instance, normally, the amount of bad debt is deducted from the income earned in calculating the profits. When viewed from a commercial perspective however, the issue of moral hazard also assumes significance – should the government be required to bear the risk of a telecom company not recovering/enforcing the debts that are due to it? Bad debts are bad both for the governing and the licensee. They are also inevitable in any enterprise.

On the one hand, there is merit in allowing a deduction for bad debts – after all, the company should not have to share with the government money that it is not actually making. On the other, it is equally arguable that the government should not have to bear the business risk of bad debts.

In the case of discounts on handsets and other similar non-tariff waivers to subscribers, a purely accounting approach would indicate that being an expenditure incurred to earn the income, a set-off from the taxable income should be allowed. However, from a regulatory perspective, one should keep in mind the element of cross-subsidy that may be inherent in such discounts to subscribers – it may not be advisable to allow such discounts to be set off in the interests of promoting competition. More importantly, government licenses granted to telecom service providers do not cover providing handsets in any manner. A revenue loss on this account should not be allowed to be claimed as a deduction under the licence as it is unrelated to the scope and purpose of the licence. As long as roaming charges are merely passthrough charges, it is only fair that they should be deducted from the AGR.

Mahesh Uppal
I would think bad debts could be excluded, discounts could be capped at a fixed amount but other charges are really telecom revenues and should be included.
Approximately how much would the telecom operators save if DoT agreed to change the definition of AGR?

Usha Rajeev
This would vary from operator to operator. A very broad estimate could be between 3 per cent and 10 per cent of the revenue share licence fee.

Mohit Saraf
It is clear that if the definition of the AGR for computation of the licence fee were amended in accordance with the pleas of telecom service providers, the savings for the operators would be substantial. Some industry estimates put the revenue from non-telecom functions like cross-company deposits and interests earned from bank deposits alone at 10 per cent of the currently reported figures. AT current revenue-sharing levels, a reduction of this quantum from the AGR would translate into a reduction in the licence fees in the range of 1-2 per cent. In addition, if the deduction of related expenses were also allowed, this would further reduce the licence fees payable.

The quantum of revenue foregone as a result of the recent 2 per cent reduction in licence fees by the government – post – unification of licences – was estimated by industry observers at a whopping Rs.8.85 billion. It is anybody’s guess what the actual quantum of additional savings might be if the government is benevolent enough to grant the telecom operators their wish list.

Mahesh Uppal
It is difficult to say in the absence of detailed data. The amount is estimated by some to be about Rs.500 million.

Should there be a further reduction in the licence fee for telecom access providers?

Usha Rajeev
Internationally, the annual licence fee is generally collected to cover the costs of administering the licences and not as a source of budgetary revenues. If such an international precedent is followed, the licence fee could drop to as low as 1-2 per cent of the AGR. As an example of a country in the Asian region, Taiwan has a variable licence fee of 1-2 per cent of AGR and all non-operating income such as proceeds from sale of fixed assets, interest income, investment income, etc. are fully excluded. Any reduction in the revenue share licence fee would directly impact tariffs, and would lead to a positive impact on the growth of teledensity.

Mohit Saraf
Any decision on whether there should be a further reduction in the licence fee for telecom service providers is a purely commercial issue which has to be sorted out between the licensor, the government and the telecom service providers.

It is true that a reduction in tariffs would increase accessibility and expand the market. With increase in teledensity being regarded as one of the markets of a healthy economy, it would generally also have a favourable impact on the economy as a whole. However, in light of the fact that tariffs already are at favourable levels there might be no urgent need for the government to intervene by reducing the licence fee for telecom access providers.

In any case, there is no assurance that a reduced licence fee would end up fattening the consumer wallet and not land up in the (telecom) company’s shareholders’ kitty.

Mahesh Uppal
No, I do not think the current percentages are too onerous. However, I think there is per haps a case for a cap on total payments, in the form of revenue share, paid to the government. The government could set this to a reasonable number and allow the operators to keep the rest. This could be an incentive for greater efficiencies and faster rollout.