NEW DELHI : In levying taxes and in shearing sheep, it is well to stop when you get down to the skin" said American author Austin O’Malley.
The aphorism pithily captures what Sunil Bharti Mittal, chairman of Bharti Airtel Ltd, and other top executives of the Indian telecom industry have been trying to convey to the government in many ways.
Mittal, in fact, went to the extent of comparing the taxation on the sector to that of the tobacco industry, a target of high taxes because of its harmful impact on society.
“On the one hand, we have the prime minister’s vision of a digitally enabled India, which requires tremendous investments, and on the other, we keep spectrum prices very high, licence fee is high, spectrum charges are high and GST is at 18%, which is almost at the highest tax bracket. We cannot have these two competing positions in the industry," Mittal said at the India Mobile Congress in October last year.
Ironically, Indian telecom operators, which offer the cheapest mobile data services in the world, pay more for airwaves than any of their global counterparts, an unsustainable situation that has proved ruinous for many.
In addition, they pay 18% goods and services tax (GST) and also 3-5% of the adjusted gross revenue as spectrum usage charges and 8% as licence fee to the government.
Effectively, for every ₹100 telcos receive from customers, ₹30 go straight to the government’s coffers. If one were to include the high interest costs associated with the deferred spectrum liabilities owed to the government, the amount of revenues shared with the government would be of a higher order. In Vodafone Idea Ltd’s case, net interest costs accounted for 30% of revenue in the quarter ended 30 June.
With a significant share of its revenue going to the government in the form of levies and interest payments, it’s little wonder that the company hasn’t had enough left to cover its other costs, leave alone capital expenditure needs. In the June quarter, the firm’s pre-tax loss stood at as high as ₹5,900 crore.
Vodafone Group Plc has now written off its investment in the India joint venture with the Birla group. “Financially, there’s been a heavy burden through unsupportive regulation and excessive taxes..." the London-based company’s CEO Nick Read said about its India operations while announcing the September quarter earnings.
FIXING RESPONSIBILITY
While the government is to be blamed for the high regulatory levies, a moot question is who’s to blame for the high spectrum-related debt on telcos’ books. Reliance Jio Infocomm Ltd has said in a letter to the government that incumbent telcos are to be blamed for not capitalizing their operations with sufficient equity and relying disproportionately on debt financing.
But before the question related to financing, it’s important to note that one of the big reasons for the high spectrum debt is a flaw in the earlier auctioning process. Telcos were forced to bid for spectrum just to continue their operations, and ended up going overboard while bidding for this so-called survival spectrum.
In the 2015 spectrum auction, for instance, the erstwhile Idea Cellular Ltd won spectrum worth ₹30,300 crore, of which around 80% pertained to areas where its licence was expiring and it needed to acquire spectrum at any cost just to continue operations. Spectrum worth only around ₹6,000 crore was for new growth opportunities, analysts at JM Financial Institutional Securities had calculated at the time.
Having said this, the telecom industry also can’t be excused for over-bidding for spectrum. With the industry growing at an impressive pace, everyone wanted a bigger piece of this growing pie—Airtel, Vodafone India, Idea Cellular, Aircel, Tatas and Reliance Communications. India’s telecom business suddenly also became attractive to other investors such as Swan Telecom, UAE’s Etisalat, Russia’s MTS and Norway’s Telenor.
More competition also resulted in a race to the bottom as many players rushed to grab a slice of the growing pie, eventually bidding up spectrum price to such an extent that it till date remains the biggest pain point for the sector.
Currently, Vodafone Idea’s spectrum dues to the government are ₹88,000 crore while Bharti Airtel owes ₹45,000 crore, according to the companies.
Even as operators seek cheaper spectrum, in July this year, the Telecom Regulatory Authority of India (Trai) declined a government request to lower prices for 5G spectrum. Sample this. In August last year, Trai had set a base price of ₹492 crore (around $70 million) per megahertz (MHz) for the 3,300-3,600 MHz band, expected to be the primary band for 5G services. In Australia and South Korea, 5G spectrum was auctioned at $5 million and $18 million per MHz, respectively, against India’s base price of $70 million, data compiled by the Cellular Operators Association of India showed.
THE DOUBLE WHAMMY
Even as spectrum costs remain the highest, mobile tariffs in India are currently among the lowest in the world. In India, the average cost of 1 gigabyte of mobile data is ₹10. Telcos in the US offer the same for $12, while in South Korea it is $15, according to The Economist.
Thanks to the drop in tariffs after the entry of Reliance Jio in September 2016, the industry’s size has shrunk by a third. Ironically, the government’s revenues from the sector too have fallen by a third, and there are calls by a part of the industry to have a floor on pricing.
The government’s revenue from sale of spectrum has also been hit in recent years. When the competitive intensity of the sector was at its peak, the government did not auction any spectrum in 2017-18 and 2018-19. In 2016-17, it raised ₹65,789 crore through the sale of spectrum at base price, a fraction of the ₹5.63 trillion worth of spectrum it had offered for sale.
While the total spectrum put up for sale was 2,354.44 MHz across seven bands, the government managed to auction just 965 MHz. There were no takers for 4G spectrum in the 700 Mhz band as it was deemed too expensive by operators.
The government, however, has promised to correct this anomaly, and Union telecom minister Ravi Shankar Prasad has assured operators that the department of telecommunications (DoT) will review prices for upcoming auctions.
This is expected to soothe operators clamouring for lower spectrum prices as they struggle with rising debt, mainly on account of airwaves bought in previous auctions, amid a brutal tariff war. Bharti Airtel’s net debt is ₹1.16 trillion as of June end while Vodafone Idea’s is ₹1.10 trillion.
Even Jio, which is the only profitable telecom operator, has supported the idea of bringing down spectrum costs. “Prices for 5G spectrum need to be critically looked at," Mahendra Nahata, board member, Reliance Jio, said at the India Mobile Congress.
“Higher floor prices will lead to 5G networks being unviable and therefore getting delayed. An equilibrium, therefore, needs to be established between government revenue and overall growth," Nahata had said.
With the telecom regulator deciding against setting a lower base price for spectrum auctions, the ball is now in the government’s court. Without timely intervention, the industry may end up being taxed to death.
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