New Delhi: India’s telecom companies, caught in the middle of a tariff war and faced with the prospect of having to stump up cash for 3G licences, may soon have to deal with another drain on their resources as the government gets set to ask them for more revenue.
The department of telecommunications (DoT) is likely to take a view that the dealer-distributor margins that auditors have found on the books of phone companies should be counted as revenue, a part of which is paid to the government as licence fee and revenue share, according to two officials close to the development.
The margins refer to the difference between the cost at which a coupon, such as a recharge card, is sold to the dealer or distributor and what the consumer pays for it. For instance, a coupon with a retail price of Rs100 would generally be sold to the dealer or distributor at a discount.
The telcos, referring to the distributor margins, have said that this was notional revenue.
“They are discounts that are given by the telecom companies, so why should the government lose revenue. The company decided to give the discount, so the company only should take the hit in its revenue,” said one of the officials cited above on condition of anonymity as he is not authorized to speak to the media. “The TDSAT (Telecom Disputes and Settlement Appellate Tribunal) order does not cover this.”
TDSAT had decided in a landmark judgement in 2007 that the operators were liable to pay revenue share to the government only for that accruing directly from telecom services.
India’s telecom operators pay 6-10% of their AGR (adjusted gross revenue) as licence fee and 2-5% of AGR as spectrum usage charges. DoT contends that AGR should include all revenue minus that which does not go into the telco’s books (service and interconnection charges) and has appealed the TDSAT ruling in the Supreme Court.
“The revenue is not realized revenue and, therefore, should not be counted as part of AGR,” a senior executive with one of the audited telcos said on condition of anonymity due to the sensitivity of the issue. “The TDSAT order contends that only revenue from realised revenue should contribute to AGR,” he said, reflecting the views of top officials in all the companies involved.
Such a move could squeeze the telecom companies further as they cope with declining tariffs amid intense competition.
“All the taxes and fees paid by the operators as well as the competition and falling tariffs are making it difficult for the operators to post healthy profits as we will see in this quarter’s results,” a Mumbai-based brokerage analyst with an international brokerage firm said asking that he not be named as he is not authorized to speak to the media. “But if they have to pay as per the law of the land then they have to pay.”
Early last year, DoT ordered audits into the books of the major telecom operators, Bharti Airtel Ltd, Vodafone Essar Ltd, Idea Cellular Ltd and Tata Teleservices Ltd, after the Telecom Regulatory Authority of India (Trai) suggested it be done every three-five years to make sure that there was no under-payment of revenue to the government.
The suggestion was made after a special audit of the books of Reliance Communications Ltd (RCom) was ordered owing to two brokerages, Kotak and UBS, finding discrepancies in the accounts of the Anil Ambani-promoted telco.
The report on RCom was submitted in October while the rest of the reports have been submitted to DoT in March.
In its report, auditors SK Mehta and Co., which audited Vodafone, said that the telco’s liabilities include Rs120 crore as licence fee and Rs68 crore as spectrum charges, totalling Rs188 crore. The auditor added that Vodafone saved Rs93 crore in spectrum charges and licence fee on “discounts to distributors” and Rs32 crore by not paying levies on reimbursement on cell site expenses. Vodafone also saved Rs21 crore by not paying levies on imputed interest on interest-free loans and Rs9 crore on forex earnings, the report said.
In the second week of March, Contractor, Nayak and Kishnadwala, the auditors for Bharti Airtel, cleared the company of any wrongdoing and said its books were in order, but added that the service provider had failed to add the margin it paid dealers for selling recharge coupons as part of its revenue and, hence, had not paid licence fee amounting to about Rs98 crore on it.
The auditors also said Bharti has a liability of Rs76 crore due to earnings from foreign exchange fluctuations, interest on money or mutual funds, among others, which are not from telecom services and, therefore, had not been included for purposes of calculating the licence fee payment to the government.
On 18 March, Chhajed and Doshi, the special auditor appointed by DoT for Idea Cellular, also gave the firm a clean chit while adding that the telco may have to pay an additional Rs74 crore to the government. But the auditors also pointed out that if the TDSAT ruling were to be applied, Idea’s liability would be far less.
DoT is at present looking into the applicability of the various laws that govern revenue reporting and the impact of various cases. One such case is that of the way the income-tax department treats the discounts.
In a case that is being fought by Idea in the apex court after the high court ruled in favour of the tax department, Idea Cellular has to make tax deductions at source for the discounts. Both Idea and Vodafone are contesting such cases.
“We have to see the applicability and treatment of the various transactions that the auditors have reported. We are having to look into precedents of cases dealt with by the courts as well as the applicable laws that have dealt with such things as the Income-tax Act,” another senior DoT official said on condition of anonymity as he is not authorized to speak to the media. “There is no direction in the telecom licence conditions and rules to deal with this so we have to see if this is to be treated as an expenditure or the company has to take the hit.”
The official is on an internal DoT committee looking into the reports submitted by the auditors of the telecom operators. Mint reviewed copies of the audit reports.
In October, Jaipur-based Parakh and Co., the auditor appointed by DoT to examine the books of RCom, said in its report that the telco failed to show revenue of Rs2,799.19 crore, causing a loss of Rs315 crore to the government in licence and spectrum fees.