The Cabinet approved several measures to extend a lifeline to the cash-strapped telecom sector, including a redefinition of the much-litigated concept of adjusted gross revenue (AGR) to exclude non-telecom revenue and a four-year moratorium on players’ dues to the government.
GS-III: Indian Economy (Growth and Development of Indian Economy, Taxation), GS-II: Governance
Dimensions of the Article:
- What is AGR?
- The AGR Issue – Timeline
- Impact of the Current Definition
- Details about the new reforms
- Significance of the new reforms
What is AGR?
Adjusted Gross Revenue (AGR) is the usage and licensing fee that telecom operators are charged by the Department of Telecommunications (DoT).
It is divided into spectrum usage charges and licensing fees, pegged between 3-5 percent and 8 percent respectively.
The AGR Issue – Timeline
- The telecom sector was liberalised under the National Telecom Policy, 1994 after which licenses were issued to companies in return for a fixed license fee.
- To provide relief from the steep fixed license fee, the government in 1999 gave an option to the licensees to migrate to the revenue sharing fee model.
- Under this, mobile telephone operators were required to share a percentage of their AGR with the government as annual license fee (LF) and spectrum usage charges (SUC).
- License agreements between the Department of Telecommunications (DoT) and the telecom companies define the gross revenues of the telecom companies.
The Contention on Definition of AGR – 14 years on
- In 2005, Cellular Operators Association of India (COAI) challenged the government’s definition for AGR calculation.
- However, DoT argued that AGR includes all revenues from both telecom and non-telecom services.
- The companies claimed that AGR should comprise just the revenue accrued from core services and not dividend, interest income or profit on the sale of any investment or fixed assets.
- In 2015, the TDSAT (Telecom Disputes Settlement and Appellate Tribunal) stayed the case in favour of telecom companies and held that AGR includes all receipts except capital receipts and revenue from non-core sources such as rent, profit on the sale of fixed assets, dividend, interest and miscellaneous income.
- However, setting aside the TDSAT’s order, in 2019, the Supreme Court of India upheld the Department of Telecom (DoT)’s interpretation of Adjusted Gross revenue (AGR), due to which telecom service providers had to pay an estimated Rs. 1.4 lakh crore to the government.
Impact of the Current Definition
Impact on Telecom Sector
- 10 of the 15 telecos that existed in 2005 have either closed operations or are undergoing insolvency proceedings in the last 14 years.
- AGR due will seriously hurt financial stability of telecom companies that are doing business in the Indian market.
- Telecom equipment suppliers may also go down as their dues will not be paid.
Impact on Banking Sector and Economy
- Banks will face the consequences of the dues as companies will be going bankrupt (non-performing assets will rise).
- The collapse of the telecom sector may increase unemployment, and reduce investment, adding to our economic and social problems.
Effect on consumers
- The failure of a few large players could lead to one or two players emerging near-monopolies.
- This leaves the Indian consumer vulnerable to high pricing, sub-standard products and lack of options.
Government will be the only winner:
- If companies are ready to pay AGR dues, it will lead to a higher contribution to the public exchequer – Meaning the Government revenue will get a huge boost and help bridge gap in the fiscal deficit and help the government finance the recovery of the economy in the current pandemic affected situation. (Note: This scenario is only possible if the companies are ready to pay the dues)
Details about the new reforms
The new reforms include nine structural reforms and five procedural reforms for the sector. Some of the major provisions are:
- The much-litigated concept of adjusted gross revenue (AGR) has been redefined to exclude non-telecom revenue and all remaining penalties have been scrapped.
- The government has also offered a four-year moratorium on players’ dues to the government.
- The regime of penalty and interest on penalty has been rationalised. Interest on dues has been maintained at a ‘reasonable’ rate.
- Foreign direct investment (FDI) in the sector has also been allowed up to 100% under the automatic route, from the existing limit of 49%.
- There would be a fixed calendar for spectrum auctions with an extended tenure of 30 years for future spectrum allocations, and a mechanism to surrender and share spectrum.
- No Spectrum Usage Charge (SUC) for spectrum acquired in future spectrum auctions.
Significance of the new reforms
- The new reforms will go a long way in addressing the telecom industry’s long-standing issues like spectrum auctioning and the AGR issue.
- The new reforms will help extend a much-needed lifeline to the cash-strapped telecom sector. The new measures will provide cash flow relief and help improve the cash liquidity scenario of the telecom companies. The moratorium of four years would ease out the stress on the cash flows of the telcos to a great extent and give enough time for the industry to carry out fundamental improvements.
- The easing of liquidity issues in telecom companies will also help various banks having substantial exposure to the telecom sector.
- The new measures will also help attract large scale investments, including for 5G technology deployment.
- The measures announced will also help generate more jobs in the Indian economy.
- Telecom reforms will boost competition and consumer interests.
- The telecom sector remains one of the prime movers of the economy and the measures announced by the government would enable the industry to achieve the goals of Digital India.
-Source: The Hindu