The issue of AGR dues has been 2020’s central point of economic discussion – other than COVID 19s economic impact – for many Indian industries. Its explanation is supposed to be simple: your telecom company earns yearly revenue, a percentage of which has to be paid as a yearly license fee to the DOT. However, whether due to department’s laziness to make the telecom industries understand what counts as “revenue” or due to industries’ rather lose interpretation of that word; the two entities – DOT and telecom – are now locked in a legal battle for the last 15 years. That battle is now resolved – with some one of India’s biggest telecom industries teetering on the edge of becoming obsolete.
The birth of AGR revenue sharing
To the non-financial minded out there, AGR refers to Adjusted Gross Revenue. It is on its basis that Department of Telecommunication calculates the levy to be imposed on the telecom license holding companies. It’s a revenue sharing model of paying yearly license fee that was introduced in 1999
Before this model of revenue sharing, there was “fixed license fee”. The National Telecom Policy of 1994 specified a fixed license fee that telecom operators had to pay on an yearly basis. Being too high fee, a lot of telecom industries objected — giving rise to a new, revenue sharing model 5 years later (1999).
1. Bharti Airtel owes INR 21,682 Crore of License Fee to DoT and
2. Vodafone Idea owes INR 28,309 Crore of License Fee to the DoT
And these two telcos owe the bulk of more than INR 92,000 Crores that are collectively owed to DOT by Airtel, Vodafone, MTNL, BSNL, Tata Teleservices and other unfortunate telecom entities. How did it get to this point?
Difference in perceived definitions of AGR
Before discussing the actual battle between the two entities – DOT and telecom industries, let’s first look at their perceived definition of AGR dues:
Definition of AGR according to the telecom companies
As per the Telecom companies, AGR or Adjusted Gross Revenue should only include revenue earned through the core operations that can be either or both of the two following services:
1. Telecommunication Services.
2. Internet Services
Anything beyond that – at least as per telecom industries – should not be counted among the services to be included in calculating AGR.
Definition of AGR according to Department of Telecommunication
As per the Department of Telecommunication (DOT), the definition of AGR can include the following sources of revenue:
1. Sale of assets
2. Interest on deposits
3. Income of Rental
4. And other sources
To get the gist of it: Suppose you are an telecom and internet service provider and other than providing internet and/or telecommunication services, you supplement your income through selling equipment, investments, selling assets, rental etc. then, the department of telecommunication has the right to include them in their definition of adjusted Gross Revenue.
The start of a 15 year battle
15 years ago, in 2005, Cellular Operators Associations of India (COAI) challenged the DOT’s perceived definition of AGR in the TDSAT (Telecom Disputes and Settlement Tribunal). 10 years later, in 2015, TDSAT ruled in COAI’s favour, ensuring that the telecom company’s perceived definition holds.
However, that victory was short-lived, for the Department of Telecommunication appealed against that judgement – in the highest court of India (Supreme Court).
The final Judgement of DOT vs. Telcos
The final judgement came in 2019 where the Supreme Court overturned TDSAT’s judgement and favoured the Department of telecommunication – creating vast dues that the telecom companies now owe to the government.
1. Interest Levy of INR 41,650 Crore.
2. Penalty of INR 10,923 Crore.
3. Interest on Penalty of INR 16,878 Crore.
The total sum of INR 92,641 Crore is now owed to the Department of Telecommunication. Now, after several appeals, the SC has accepted the request of giving 20 years to the telecom companies to enable them repay the aforementioned dues in a staggered manner.
What’s the reason that two of the biggest telecom operators in India – Airtel and Vodafone Idea, are now in this state? Well, there are two words: Confusion and complacency.
Confusion created faults at both sides
When we dive deep into the license document associated with AGR dues, we can take a look at the actual official calculation process associated with it:
1. 8% of AGR is counted as the License fee.
2. 3-5% of the AGR is counted as the Spectrum Usage Charges.
As per the many rules specified in DOT Compliance, the above AGR dues hold. However, let’s look at the official definition of Spectrum Usage Charges:
A spectrum usage charge is payable by the licensees providing mobile access services, as a percentage of their Adjusted Gross Revenue (AGR). Spectrum usage charges is payable as per the spectrum slabs/ rates notified by the Government from time to time.
If you see above, you can see that there is a discord between the first and second sentence.
The first sentence says that the percentage of Adjusted Gross revenue is taken as the Spectrum Usage charges (SUC). And the second sentence setups another definition of the payable SUC.
This has created two distinct definitions of SUC. The first one says that SUCs are charged as a percentage of AGR and the second one says that the charges as payable as per the spectrum rates notified by the government. Now, if we connect these two definitions, AGR is contextually defined as the revenue generated as per the spectrum slabs/rates notified by the government. That realization drives the point towards the favour of telecom in this whole AGR dues mess.
That being said, the entire matter isn’t black or white, there is an aura of confusion surrounding that statement and there is fault from both sides here. When take the ethics of DOT compliance into account, we can discern the misgivings from both sides:
1. Fault from department’s side: The department, by its very laws failed to establish a non-ambiguous definition of AGR. Yes, it specified that the entire revenue of telecom companies, beyond the core operations is also to be counted, but it wasn’t clear on that. What pushes this mistake further is that up until now, they were accepting the AGR dues as it is, without the entire gross income counted.
2. Fault from the telecom company’s side: Telcos, despite being marginally right in this regard, can be considered a culprit for loosely interpreting AGR as they wished – and not confirming that interpretation with the department. Furthermore, while they finally took the matter court, they were also filing returns as per their own perceived definition – weakening their case.
Current Status and Parable from it all
Currently, Airtel is doing well enough and definitely capable of paying its AGR dues. But Vodafone Idea is another story. Being on its last legs, it’s trying to scrounge up .
The parable here is that you have to be careful how you perceive government-given notifications. If you are planning to start your own telecom company someday, you should be hawk-eyed about the legal matters of that business.