What is the basic problem with revenue share?

The structure of the license fees as % of AGR (Adjusted Gross Revenue) is an outcome of the "migration package" offered by DoT to the telecom operators. At that time the operators were drowning under the weight of huge "self-imposed" liabilities (i.e the obligation to pay license fees in fixed installments every year), therefore the deal came to them as a rescue. Hence, they immediately agreed, but in the process, lost all flexibility of optimizing their business - leading to a huge debate around the definition of AGR which is currently being battled in the courts with no resolution in sight (See my earlier note - "License Fees @ % of Revenue: What is the dispute all about?"). Be this as it may, the whole concept of charging license fees as a % of revenue is retrograde and has outlived its utility and needs an urgent overhaul. Why? Let's discuss the reasons.

It discourages sharing of resources

If licensed entities want to share resources they can't do so without increasing their overall tax liabilities, as the cost incurred by one is the revenue for the other. For example, if an entity "A" is sharing some resource (let's say spectrum) with "B", then "B" must pay "A" a mutually agreed rent for its use. This payment adds to "A's" revenue, thereby increasing his license fee outflow to the government. On the same amount "B" also has to pay a license fee, as the rent it paid to "A" emanated from the revenue it had earlier earned using the shared resource - leading to a situation of double taxation. Thankfully, the government did not choose to license the tower companies. If it did, the whole tower business would have collapsed due to the "erosion of margins" of these companies, thereby severely impacting the health of the overall sector.

It discourages investments in networks

The current system is a tax on the inputs (revenues) than on the outputs (profits) - a preferred norm for taxation. As taxing inputs dilute the operator's ability to invest, especially in the areas where the cost of running operation is too high (for example, rural areas). As "license fees" erodes a sizable portion of the operator's top line - destroying the viability of running services in these far-flung areas. It also decreases the operator's ability to cross-subsidize the operations in rural areas as the profits in the urban areas are not sufficiently high to compensate the losses incurred in the rural areas on account of outflows on "license fees". Some might argue that the (revenue share) is not a tax but a legitimate demand from the government that the operators agreed to pay as per the earlier migration package. That is true, but one needs to note that spectrum at that time was given free and not charged for. Now since the government is charging for spectrum through auction at unthinkable rates (till date Rs 3.5 lakh Cr have been collected by the govt in various auctions), is it justified for the government to collect additional amount as revenue share?

It encourages hoarding of spectrum

In the current system, a player which monetizes spectrum more efficiently pays higher license fees compared to others. Hence, a "non-serious" player can continue to hold on to spectrum without feeling the pressure of selling it to those who can put it to good use.

It makes MVNOs unviable

MVNOs create value by leveraging their strength in specific areas and geographies. Since the current model imposes a license fee on the MVNOs, it even erodes the thin margins that these MVNOs desperately need to run their businesses. See my earlier note in this regard, "How Effective are the VNO Guidelines?" The govt also is in a fix - not collecting license fees from MVNOs opens up the opportunity for arbitrage - leading to a stalemate situation.

It disturbs the playing field

A licensee selling services pays all kinds of fees to the government (auction fees, license fees, spectrum fees etc), with no ability to partner with any content player to earn some additional revenue (TRAI's 8th Feb 2016 order on differential pricing prevents such partnerships). Whereas, a non-licensee freely replicates the same services (voice and text) and makes it available to the users at no additional charge. These services are in direct competition to those provided by the operators. It works perfectly for these non-licensees, as they have a totally different business model - allowing one side of the market (the users) to be subsidized by the other side of the market (advertisers, retailers etc).

It open opportunities for arbitrage

It is possible for an operator to create a subsidiary who can buy "pre-paid" data packs from the operator at a discounted rates, and then charge a higher premium from the consumers. Since the operator has sold it at a discounted rate, its revenues will be lower so will be its license fees. But, the subsidiary can generate more profits, on which no license fees will be applicable as it is not a licensed entity.

What is the solution?

Ideally, the government should not collect license fees when the spectrum is sold at exorbitant rates. But, practically it might be difficult for the government to do so when it has targets to fulfill. Hence, somehow the revenue share needs to get translated into a "fixed fee" paid by the operators based on some defined criteria. But what criteria to use? The collum by Mahesh Uppal "Breaking the telecom logjam" provides some interesting insights. As soon as this issue is resolved, all court cases will disappear and operators will be fully empowered to try new business models (like procurement of handsets etc) in order to monetize their investments.

 (Views expressed are mine and do not reflect that of my employer)