• AGR, or adjusted gross income, has been a disputed challenge since 2003 between the Division of Telecom (DoT) and telecom operators

  • In what could solely be construed as a damning indictment, the Supreme Court docket pulled up the TSPs for his or her delaying techniques

  • If Vodafone-Concept and Bharti Airtel have a large enough cushion, the query is why are they portray a doomsday state of affairs within the telecom business?

Currently, we’re studying many articles on how the Supreme Court docket has delivered the coup de grace on a struggling telecom sector by ordering Vodafone-Concept and Bharti Airtel—two main gamers who collectively management two-thirds of the telecom market and cater to 600 million Indian prospects—to cough up revenues value roughly Rs 1.33 trillion as a part of AGR dues that the businesses had been contractually sure, however had up to now refused to share with the federal government.

The telecom operators, after a 14-year authorized battle, misplaced their case on the Supreme Court docket on 24 October, 2019. The apex courtroom directed the businesses to clear their cumulative dues, penalty and curiosity inside three months. All hell has damaged free since then.

The AGR, or adjusted gross income, has been a disputed challenge since 2003 between the Division of Telecom (DoT) and telecom operators. This dispute arose out of the greed of those operators to disclaim the general public exchequer its due share of the revenues from the usage of a finite nationwide/public useful resource: Spectrum.

Following the brand new telecom coverage of 1999, all telecom operators migrated to the income share mannequin from the fastened licence mannequin. This new mannequin was created to lighten the load for the operators and enhance enterprise viability. Accordingly, it was decided that the operators would share 15 % of their AGR with the federal government yearly. After two revisions, the AGR payout now stands at simply eight %.

However, in 2003 and proper till 2019, the operators held up paying a share of the AGR by cleverly inducing authorized nuances into the AGR clauses that didn’t merely exist. They selected to interpret AGR as income accruing solely from their core operations of voice and information and mentioned they might not pay AGR on every other income stream.

The matter went to TDSAT (Telecom Disputes Settlement and Appellate Tribunal) after which to the Supreme Court docket. Way back to October 2011, the apex courtroom shot down the telecom operators’ argument. It dominated that the AGR definition was broad sufficient to incorporate all revenues and no one, not even the Telecom Fee or the TDSAT, had the ability to rewrite any clauses of the contract. Saying so, it dedicated the case again to TDSAT.

In 2015, regardless of the Supreme Court docket’s unambiguous judgment, the TDSAT, shockingly, dominated in favour of the operators. This prompted the federal government to maneuver the Supreme Court docket, resulting in the newest judgment on 24 October.

The Supreme Court docket as soon as once more demolished the argument of telecom service suppliers (TSPs) and gave an earful to the TDSAT for its discovering in favour of the operators whose solely goal is to undercut the exchequer. However the rising narrative within the media paints the federal government as a Shylock, out to bully non-public telecom corporations into coughing up cash that they’re in no place to pay based mostly on the demand that it’s unjustified.

One analyst claims that the Narendra Modi authorities is ‘squeezing’ the telecom operators however it ‘received’t remedy govt’s credit score and financial crises.’  One other harped on the identical theme, accusing the federal government of attempting to fill a ‘finances gap’ by ‘gouging its wi-fi carriers’.  Yet one more warned of large job cuts following the Supreme Court docket ruling.

Airtel and Vodafone-Idea are indeed victims of their greed; govt shouldn't reward them by easing... - Firstpost vodafone, victims, their, shouldn, indeed, greed, airtel

Representational picture. Reuters.

In the meantime, each telecom operators have known as Supreme Court docket’s resolution ‘disastrous’, warned of ruination to telecom sector, threatened to derail the federal government’s ‘Digital India’ plan, and thru the COAI (Mobile Operators Affiliation of India), sought to pressurise the Union authorities into saying a whole waiver of all dues or not less than a reduction bundle that includes paying solely the principal quantity, and that too staggered over a 10-year interval after a two-year moratorium. That is audacious contemplating we’re speaking about dues already going again to 14 years of devious delay.

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The argument of the telecom operators—Vodafone-Concept and Airtel—is that until the federal government takes a lenient view, the telecom sector might be destroyed, numerous jobs might be misplaced, customers will get damage and the business will flip right into a monopoly; that dart being thrown at Reliance Jio, the latest entrant available in the market that has prompted large disruption within the sector.

In different phrases, after failing to honour their contract for over a decade and exhausting all authorized recourse, the telecom operators are actually attempting to shift the onus of their non-compliance to the federal government for anticipating its dues.

The important thing questions listed here are two: One, are the federal government’s calls for reliable and justifiable? Two, are the businesses in such unhealthy form that they can not clear the dues regardless of the Supreme Court docket asking them to take action? And a associated third query, even when for argument’s sake we assume that the federal government’s calls for could break the again of those TSPs, wouldn’t it deal a crippling blow to the telecom business?

Earlier than we deal with the questions, it’s value noting the stand taken by Reliance Jio, the third main participant within the telecom sector. Actually, Jio is now the second-largest telecom firm in India with a buyer base of 34.eight crore after market leaders Vodafone-Concept with 37.5 crore. Airtel is third with 32.7 crore (in line with the newest official information launched by TRAI in October.)

Reliance Jio takes a stand

Jio has taken a stand opposite to Vodafone-Concept and Airtel. It has accused the COAI of ignoring its submissions. In a letter addressed to Union Minister for Telecommunications Ravi Shankar Prasad, Jio has accused the COAI of blackmailing the federal government, taking a stance that quantities to dishonoring the apex courtroom’s judgement, argued towards extension of a reduction bundle to the telecom sector and claimed that the 2 TSPs have sufficient assets to fulfill the calls for. Jio has additionally blamed the COAI for performing on the behest of Vodafone-Concept and Airtel and accused the organisation of turning right into a mouthpiece for 2 operators as a substitute of representing the views of the business.

Since we now have two units of arguments, we could scrutinize the validity of respective positions.

It’s attention-grabbing to notice that in line with the CAG, six TSPs (Vodafone India, Concept Mobile, Bharti Airtel, Reliance Communications, Aircel and Sistema Shyam) have been constantly under-reporting their revenues to scale back the tax burden.

In a report tabled in Parliament on 21 July 2017, the Comptroller and Auditor Normal put the full understatement of AGR by six operators at Rs 61,064.56 crore and calculated that this has resulted in a ‘quick cost’ of Rs 7,697.6 crore to the federal government. The interval of audit for 5 gamers was from 2010-11 to 2014-15 (Reliance Jio had not begun its operations throughout that interval), whereas for Sistema Shyam the interval underneath evaluation is from 2010-11 to 2014-15.

We’ve got proof, due to this fact, to notice that Airtel, Vodafone, and Concept, amongst others, had been underreporting revenues that resulted in a monetary loss for the federal government. It is usually value noting that Airtel, Vodafone, Concept (and later Vodafone-Concept) reportedly didn’t declare the disputed quantities underneath the levy of AGR as “provisions of their books,” an accounting process that’s binding on them underneath the Firms (Accounting Customary) Guidelines, 2015, learn with Part 469 of the Firms Act, 2013.

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Why is that this vital?

As a report in Financial Instances factors out, in 2004, TSPs declared gross revenues of Rs 4,855 crore which, by 2015, shot as much as a whopping Rs 2.37 lakh crore. However throughout this time the AGR levy got here down from 15 % earlier to 13 % after which eight % in 2013. Because of this the telecom corporations determined to squeeze the finite pure useful resource dry even whereas they had been earning profits hand-over-fist. This was pure company greed. So their protestations to the federal government about this ‘catastrophe’ coming at an inopportune second and the doomsday portrayals within the media are extremely suspicious.

Much more so as a result of few of those pundits are questioning the operators for failing to make provisions of their annual accounts. They willfully ignored the accounting process of declaring the disputed quantities as ‘provisions’. In different phrases, they weren’t making sufficient provisions of their books for a authorized setback although the AGR challenge remained disputed.  That is additionally inadequate compliance with Accounting Customary Guidelines.

As talked about earlier, a key query within the dispute is whether or not the federal government’s interpretation of AGR (that features a levy on revenues from non-core operations) is unjustified. It’s value quoting from the Supreme Court docket judgment on this.

Within the judgement delivered by a Supreme Court docket Bench led by Justices Arun Mishra, AA Nazeer and MR Shah, the courtroom noticed: “The demand was raised for the primary time within the yr 2003 although the definition of gross income was clear, and as is clear from the correspondence and the settlement reached between the events, there was little question what constitutes gross income.”

The apex Court docket then goes on to watch that the problem to the definition of AGR, “was discovered to be sans any foundation by this Court docket. The objections raised in regards to the validity of the gross income, had been wholly unsustainable and on the face of it, had been liable to be rejected, and got here to be rejected lastly and conclusively by this Court docket within the yr 2011″.

In what could solely be construed as a damning indictment, the Supreme Court docket pulled up the TSPs for his or her delaying techniques, and noticed: “The regime of income sharing was extraordinarily helpful (for licensees) than the earlier regime of the fastened licence price, they usually have tremendously benefited by it as is clear from the statistics of the income earned by the licensees underneath the income sharing regime. When Authorities has parted with the privilege as to income on sharing foundation underneath the license, and an settlement entered into, it must have been exactly adopted. The conduct of the licensees was extremely unfair, and anyhow and someway, they’d tried to delay the cost.”

We now see that the TSPs had been making a killing from the revised regime and charges however had been ignoring accounting procedures, under-reporting revenues and, because the Supreme Court docket identified, had been absolutely conscious of the definition of AGR whereas going into the contract and tried to withhold cost so long as they may.

It has been mentioned that the telecom sector is underneath misery and that the businesses are underneath no place to pay the cash. Even when that is true, the argument is specious. If corporations interact in unhealthy enterprise conduct, take willfully unsuitable selections, fail to adjust to guidelines and contractual obligations or get caught whereas attempting to outsmart the federal government in paying taxes, then it’s only truthful that they endure the implications of their actions. Taking part in the sufferer now could be a really handy place. If these corporations are actually given a bailout bundle and monetary reduction, the federal government will make an error.

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The granting of a monetary bailout—that these corporations are desperately looking for—might be tantamount to rewarding unhealthy enterprise conduct, incentivising the cooking up of books and under-reporting of revenues and consequently, punishing the trustworthy taxpayer. This creates not solely an ethical hazard but in addition a dangerous precedent. Any firm from any sector could attempt to pull off an identical stunt.

So far as the well being of Vodafone-Concept and Airtel are involved, there are causes to consider that the businesses have sufficient assets to fulfill the dues. Even when we disregard the factors put ahead by Reliance Jio in its letter to the minister—that the TSPs could monetise their current property, elevate recent fairness, income generated by way of divestment of worthwhile telecom property—each these corporations are backed by promoters which have deep sufficient pockets. All that Singtel—that at present holds 48 % stake in Bharti Airtel—must do is to extend its stake and make Bharti Airtel a foreign-owned entity. Such a transfer could already be afoot.

Equally, Vodafone Plc., the UK-based dad or mum firm of Vodafone-Concept, has denied rumours that it’s planning to exit India and has reiterated its dedication to again the three way partnership in “difficult occasions”.

If these two TSPs have a large enough cushion, the query is why are they portray a doomsday state of affairs within the telecom business? It stands to purpose that if the telecom operators escape their tax liabilities by showing to go belly-up, then it’s a ok technique. Apart from, with jobs and slowdown within the financial system turning into political points, the TSPs could discover the time opportune in taking part in to the gallery and forcing the federal government’s fingers. When corporations threaten to chop jobs to flee their legal responsibility, it could be secure to doubt their intentions.

Lastly, even when for argument’s sake we assume that clearing of dues could put the businesses within the pink, it could solely imply a reinforcing of ‘inventive destruction’, the time period coined by Joseph Schumpeter to explain how free-market operates, unhealthy companies die and are changed by corporations which are run extra effectively. That is the raison d’être of a free-market financial system.

The unlikely exit of Vodafone-Concept or Airtel—we don’t want that, however are compelled to contemplate it solely as a result of the businesses themselves are doing so with out compunction—could create area for a brand new and extra environment friendly participant within the system that can find yourself benefitting the customers.

We’ve got seen that occur within the civil aviation sector in recent times. Kingfisher went bust after which market chief Jet Airways. The enterprise was then redistributed to the opposite established operators and new ones similar to Air Asia and Vistara are spreading their wings.

Why, nearer residence, the telecom business itself has seen a number of collapses and mergers. Tata merged with Airtel, Reliance Communications went bust and Vodafone and Concept turned Vodafone-Concept with out catastrophe hanging the nation. That’s the reason there’s merely no purpose why the federal government, politically susceptible because of the slowdown, should give in to the unjust calls for of the telecom operators.

(Disclaimer: Reliance Industries Ltd. is the only real beneficiary of Impartial Media Belief which controls Community18 Media & Investments Ltd which publishes Firstpost)

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Up to date Date: Nov 04, 2019 14:11:16 IST

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