Telecom sector in India: Levies imposed need GST like template

The telecom service sector in India is well-accepted to be a success story and as a flag-bearer of reforms and liberalisation, having delivered huge benefits to consumers in terms of technology, choice and affordability.

The telecom service sector in India is well-accepted to be a success story and as a flag-bearer of reforms and liberalisation, having delivered huge benefits to consumers in terms of technology, choice and affordability. Strangely, despite this, it is also known to be overburdened with various telecom-specific levies and taxes. A comparison of the Indian situation with that of some comparable economies is given in the accompanying graphic. It has now reached a stage where it needs urgent addressing; otherwise, India’s ambitions on Digital India, 5G and other technological advancements could get derailed. However, even before addressing the high telecom levies, one needs to first revise the current inefficient mechanism for applying the levies related to licence fee and spectrum usage.

Since 1999, when we introduced the levy of an ongoing licence fee as a percentage of the AGR (adjusted gross revenues), we have had a rising swell of disputes and litigations. Disputes rose when the spectrum usage charge (SUC) was converted from a fixed levy to a percentage of the AGR. Much litigation is pending in various courts, resulting in tremendous waste of time and other resources for both the government and the operators. Disputes invariably relate to what is deductible or ‘adjustable’ from the gross revenue to arrive at the AGR value on which the licence fee or SUC levy will apply. There have been several pronouncements by the Trai, TDSAT, high courts and even the Supreme Court; regrettably, there has been no satisfactory or abiding solution. All parties concerned are unhappy and unsettled. Operators are stressed financially and the government continues to have its apprehensions of possible ‘arbitrage’ by some operators in reporting or deriving AGR. This was possible at a time when different services by the operator—NLD, ILD, access or internet—attracted different licence fee percentages. However, even after this was addressed by moving to a uniform licence fee for all services, disputes did not abate since there has been much wrangling on what constitutes telecom revenue and what items provide revenue unrelated to the telecom licence. Thus, unless we move away from the AGR base, we cannot have an unambiguous base for seating the new and, hopefully, improved, levy structure.

There is one more anomaly needing attention in whatever new model is proposed. When the revenue share regime was introduced, spectrum and licence were bundled together and auctioned or allocated. Hence, the need arose to apply high spectrum usage charges besides the licence fee. However, since 2012, spectrum has been delinked from licence and allocated separately and transparently through auctions. In such a situation, when the spectrum is already paid for via the auction-discovered price, continuing with a high SUC is a ‘double whammy’.

Apart from addressing the these requirements, the new mechanism should satisfy these four requirements: there should be no extra cost to the consumer, all charges should be open and transparent, with nothing hidden, the change must be revenue-neutral to the government, and it should allow migration of the operators to be, as far as possible, on a “No worse off” principle.

The proposed new method could use the a GST-type methodology to avoid the dispute-ridden AGR route and go directly to the incontrovertible revenue base of the revenue receipts from customers that attract GST. Let us assume that this is worth `100. This would attract a 9% (Rs 9) central GST and another 9% (Rs 9) state GST. This takes the total bill to Rs 118, which is the expected normal amount to be paid by the customer. Now, let us look at a figure for the new Telecom Specific Tax (TST) which could provide the government a revenue-neutral situation. On the billed total revenue of `100, this figure is likely to be about 8-9%—let us say this is X%. We now take `X away from the base of Rs 100/- to get the net revenue to the operator. By this process, we have ensured that government gets its GST as well as its revenue-neutral inflow. The customer has also not paid anything extra, and the process is totally open and transparent since, like GST, TST would also be shown on the bill.

Again, like GST, TST would be treated like a VAT, and there would be permitted set-offs at various stages in the chain of service, right till the end consumer. This would avoid the big problem of double taxation that is currently the barrier for introduction of many innovative and beneficial services. If a telecom service provider (TSP) ‘B’ procures a service from another TSP ‘A’, and pays GST and TST on the value, it would be entitled to set off these payments when it adds value and sells his service to customer.

The proposed scheme also has the advantage of not impacting, in any way, the important communities of passive service providers and unlicensed or registration-class service providers since these categories do not have any exclusive rights or protections. This aspect would help open the floodgates for innumerable innovative services and applications that 4G and 5G can provide.

The new method is simple and elegant and benefits all stakeholders. The customer has no extra burden and gets openness and transparency in her bill, the government’s existing revenues remain intact and it gains tremendous administrative efficiency, disputes and litigations fall and industry gets a predictable and stable environment that facilitates growth, innovation and accelerated progress.

The accompanying graphic shows how Indian telecom is burdened with levies as compared to other regimes. The sector has a crushing debt burden of over `4.5 lakh crore. The government has set up an inter-ministerial group to look into this issue. The writer therefore strongly recommends that the above-described TST be introduced at the earliest and, concurrently, at least a small discount of about 20% on the revenue-neutral level be provided to give direly-needed financial relief to the sector. It may be noted that even at the time of the famous WLLM dispute settlement in 2003, apart from other aspects of the settlement, a 2% reduction in the AGR-based licence fee was provided to operators. A 20% reduction in the new revenue-neutral licence fee would approximate the above-mentioned 2% figure. Precedent, therefore, fully supports this recommendation.

Last, but not the least, the new licence fee percentage should not be a fixed figure; the next year’s pecent figure should be calculated on the ongoing year’s total revenue when it is available—and, so on, year after year. Thus, the license fee should be allowed to steadily decline till we reach the international levels. All the while, the government’s current inflow from LF&SUC is protected and, separately, the spectrum auction fee proceeds keep coming in—a win-win for all including customers. As Hamlet would put it, “‘Tis a consummation devoutly to be wished”.