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Why RCOM wants moratorium on GST, lower DoT charges, and an IUC free market

Anil Ambani led Reliance Communications (RCOM) proposed a discount in license fee, taxes, spectrum usage charges (SUC) and other deferred payment owed to the government by telecom companies, to ease the financial stress on service providers.  In an investor’s presentation, RCOM also asks the government to remove interconnect usage charges (IUC) payable by one telco to the other for using the other’s mobile network for terminating calls. According to RCOM, due to unlimited calling packs, termination charges lead to more IUC payouts to other telcos, and not necessarily the same amount of return.

The telco suggested the following rebates in telco’s payment liabilities:

Spectrum Usage Charges (SUC): The telco also wanted SUC to be set at a uniform rate of 1% and an option for payments to be made annually along with arrears if any. This is lower than the 3% SUC rate considered by DoT for 2016 auctions. SUC is payable by a telco to the government for providing mobile services, as a percentage of their Adjusted Gross Revenue. Note that DoT had issued notices to 6 telcos including RCOM for allegedly under-reporting their AGR, causing losses to govt.
License Fees: RCOM wants license fee rate to be lower at 5%, a reduction of 3% from existing 8%. Note that DoT had last dropped license fee rates in 2013.
Deferred Spectrum Charges: RCOM also wants the government to extend the repayment period of all existing liabilities owed by telcos on the basis of longevity of the spectrum band obtained.
Moratorium on DoT charges: Apart from this RCOM wants a moratorium (for 3 yrs) or a delayed enforcement of DoT’s levies and charges including payments based on Adjusted Gross Revenue and other spectrum related charges.
Moratorium on Service Tax/GST:  The telco wants 3 years moratorium for the newly enforced GST taxation regime. Apart from RCOM, cellular lobby body COAI has also written to finance ministry asking it to reduce 18% GST rate set for telecom companies.

As per RCOM’s estimates, the government is owed more than Rs 750,000 crore by the industry:

Why RCOM is asking for discounts, rebates in govt levies

RCOM’s suggestions do not come from bare expectations. Here is why according to it, the telecom industry requires special rebates and monetary reductions.

  • To ease payment of its mounting debt: RCOM is debt ridden and is currently struggling to pay close to Rs 25,000 crore in debt owed to its lenders which include bankers like SBI. As of FY17, RCOM’s total debt stood at Rs 45,000 crore.
  • Falling telco revenues: RCOM’s losses increased by 82% QoQ in Q4-FY17 , and it lost more than 10 million data customers to the ongoing completion. According to RCOM’s estimates, FY17 was the first time since inception that the industry’s revenue and EBITDA declined. The combined revenues of the industry dropped by NR 2,10,000 Cr in FY 17, leading to a further drop in EBITDA earnings by Rs 12,000 crore, RCOM said. But note that Airtel is the only operator on the below list to generate a higher EBITDA in FY17 while the rest posted a decline.

  • Fall in Government revenues: This subsequently hurts government revenues. Data from a Lok Sabha reply in April showed that Government’s revenue generation from the telecom sector has fallen considerably: License fee collection from telcos during Q3-FY17 stood at Rs 3450.13 crore, which is down 15% when compared to Q1 FY17. SUC charges collected from telcos have also fallen 22% in Q3 when compared to Q1 in the same year
  • Layoffs: RCOM added in its investor’s release that employment in the sector will be affected by a huge margin due to the competition. It said that around 10,000 people lost their jobs in telecom last year, while the telco expects this number to go up till 30,000 to 40,000 in the next 12-18 months.
  • Low return on capital: RCOM claims that as per prevailing conditions, the return on investment in the telecom sector is just 2%. This will affect new investments, especially investments from foreign companies. RCOM said that smaller foreign players like Etisalat, MTS and Telenor have exited the Indian market earlier or are in exit mode.

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