Telcos Need Three More Bold Decisions

Users and service providers are swimming against the tide even after the abolition of retro tax.

Shyam Ponappa    |   August 24, 2021

Undoing the retrospective tax amendment affecting Vodafone Group and Cairn Energy among others was an excellent move, and proves what the government can do. In this spirit, two more shackles must go for us to fully exploit telecom and digitisation:

a) Adjusted gross revenues (AGR) for telecom operators need to be defined rationally as licence-related revenues by policy and legislation.

b) Spectrum allocation and pricing need a complete revamp. Appropriate policy and legislation can enable spectrum use as a resource for the common good, paid for by a share of revenues for usage instead of auctions. This will make spectrum costs an operating expense, and will not require enterprises to make up-front capital investments, as with other resources: Electricity, water, and leased land.

Like the retro tax, these self-imposed constraints have restricted telecom and digitisation support, limiting our capacity. It is like swimming against the current, whereas policy changes can remove these limitations, enabling service providers and users to swim with the current. Removing all three would do that, putting India’s telecom and broadband into a much higher trajectory in realising our overall potential.

The government must frame policies for the public interest in communications and digitisation in a fair, transparent way, to break out of the absurd situation of pricing spectrum at five times the Organisation for Economic Co-operation and Development nations, whose per capita income is 15-20 times higher. This will help us resolve the contradictions of the lowest-priced broadband with the highest cost structure, and atrocious service quality.

Policies to Clear Impediments

AGR: The overreach in the AGR definition is a self-created obstacle. The Department of Telecommunications (DoT) left the term undefined in the licence agreements in 1999. It was to be defined with the Telecom Regulatory Authority of India’s (Trai’s) recommendation, but when finalising licence agreements in 2002, the DoT ignored the recommendation that AGR should include only revenues from cellular mobile services. The operators’ appeal before the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) in 2003 was upheld in 2006; the DoT appealed in the Supreme Court. The SC refused to intervene, but ruled that the DoT could pursue its concerns with the TDSAT. The TDSAT in August 2007 accepted most of the recommendations made by Trai. And so it went, with many disputes and appeals by the UPA as well as the NDA governments, until a TDSAT judgment in 2015 overturned previous TDSAT orders, excluding only capital receipts. Later, an SC judgment in 2019 even included capital receipts.¹

The following instances illustrate the absurd claims, contradictions, and orders:

• The government had informed the SC in a hearing in 2011 that non-telecom revenues were not to be included in the AGR.²  Yet, the TDSAT judgment of 2015 citing this statement ruled exactly the opposite, excluding only capital transactions.
  
  
• The SC’s judgment of October 24, 2019, dismissed the Trai and TDSAT recommendations of 2006 and 2007, and extended the definition of AGR to all non-telecom revenues. Previously, various courts had reportedly set aside such claims in 2006, 2007, 2011, and 2015.³
  
  
• Thereafter, in what appears as inappropriate discrimination in the absence of explicit policies, the SC in 2019 excluded public sector dues amounting to Rs 2.7 trillion from GAIL, Oil India, Power Grid, and so on. Expressing outrage at such demands on PSUs, the SC insisted that private operators must pay their dues of Rs 1.47 trillion. No wonder the DoT and the rest of the government seem confused, because like the retro tax amendment, these actions appear to be arbitrary.

Therefore, the government must frame a policy definition for AGR informed by Trai recommendations that is rational, in the public interest for better communications, fair, non-discriminatory between state-owned and privately-owned companies, and transparent.  This will satisfy the SC condition of due process according to government policies.

Spectrum Allocation & Pricing

Current technology favours giving operators shared use of spectrum and networks across all technologies, because coverage and capacity increase at lower cost. Yet, because wireless communications evolved from a time when mitigating interference was the primary technological concern, the method adopted was of exclusive spectrum assignment (“allocation” in common parlance) of distinct bands to each operator. This method, initially a technological necessity, then became the customary practice because governments in many countries sought high fees from spectrum auctions. Many countries suffered as this burden led to the collapse of the sector for a decade.⁴  India was one of these, because the meteoric rise of our mobile telephony stalled, and is now so shoddy. The damage is pervasive, because of inadequate communications infrastructure that affects many areas, such as energy and water management, education and skilling, healthcare, and productivity across sectors —commerce, transportation, hospitality and tourism, manufacturing, agriculture— and in mitigating environmental impact.

Technology needs wider swathes of spectrum for high data throughput. It is also able to manage interference much better. We cannot have effective coverage without better wireless access networks. As we move towards 5G and beyond, the emphasis on wireless communications will increase. This can happen through sharing of spectrum and facilities among operators, which will likely be the norm in 5G and 6G, providing a high multiplier to network usage, while considerably reducing capital investment needs countrywide.

The government has to frame policies that help to do this, by removing obstacles such as retro taxes, AGR, and capital expenditure on spectrum. Replacing an extortionary approach to the communications sector with a constructive emphasis on infrastructure support will get us there, as well as enhance government revenues.⁵  Policies can be framed to help achieve better health, education, skilling, productivity, and living conditions. The major changes of using spectrum as a shared resource with payment for usage through a share of revenues, in combination with undoing retro taxes and AGR, are the required steps. There are different ways to do this, and the government needs to steer the process through consultations to an acceptable way for us to move forward with 4G, 5G and beyond, for effective communications and digitisation.

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Shyam (no space) Ponappa at gmail dot com

1: https://www.theleaflet.in/agr-order-a-case-of-subjective-judicial-overreach/

2: https://dot.gov.in/sites/default/files/TDSAT%20Judgment%2023-04-2015.pdf

3: https://www.financialexpress.com/opinion/why-isnt-govt-at-sc-on-agr-ruling-threatening-of-telcos-like-airtel-vodafone-idea/1775075/

4: https://organizingindia.blogspot.com/2011/02/spectrum-auctions-jhatka-or-halal.html

5: https://organizing-india.blogspot.com/2020/08/configuring-indias-digital-ecosystem.html

Arbitration Awards And The Public Interest

An objective, analytical approach to pursuing or resisting claims and arbitration awards is advisable.

Shyam Ponappa    |   August 5, 2021

The arbitration awards against India’s retroactive tax claims now pose a serious threat. Cairn Energy has a freeze order on Indian government assets in Paris, and similar developments are possible in the US from actions by Cairn and Devas Multimedia. Are there ways to mitigate these threats and reputational damage? Objective analysis of the facts is advisable before deciding the balance of interest in choosing to continue as before, or to consider changes.

The issues go beyond the legitimacy of awards and India’s sovereign rights, to India’s exposure and its commercial implications. The country’s rights are not being questioned; the scrutiny is of fair and equitable treatment under investment treaties, and changes in agreed terms. The choice is to continue as before and take the consequences, or to undertake an informed, objective analysis of likely costs and benefits of resisting or accepting awards before deciding what to do in our interests. The options are to litigate endlessly, or accept awards, or to negotiate acceptable settlements. Resolution would enable reallocation of our energies — our political, administrative, and judicial resources, and society’s productive capacity and mind-share — to more constructive purposes.

Additional considerations include substantial, continuing damage to India’s business reputation for not honouring agreements and awards, and for resorting to repeated appeals. Ideally, dilatory tactics need to be replaced with being more reasonable and less arbitrary. Strategies in the public interest need to be developed, such as the attitude to arbitration in not accepting unfavourable awards. The indirect costs and collateral damage are enormous, such as to the telecom and energy sectors since 2012, to affected companies and employees, to the investment climate, and the cascading effects through the economy. The disarray and inadequacy in telecom, for instance, are partly attributable to this factor. While foreign investment is increasing, the type of investors also matters. Present investments favour quick profits from the market, with less emphasis in building productive capacity in infrastructure, manufacturing, agriculture and so on.

Pranab Mukherjee, who introduced the retroactive tax as finance minister in 2012, wrote in his memoirs that despite the angst, his successors maintained the same stance. He had said at the time that if the law had not been changed, it would have cost the government Rs 40,000 to Rs 50,000 crore, as companies who had not contested similar demands would claim refunds. If this is a fact, how should it affect government decisions? The most important criteria presumably are cash flows, including awards if enforced, and reputational effects going forward.

Compulsions for retaining a law begin from inception, because once the government makes a law, there is a due process to be followed, or the appearance of it. International tax claims cannot be surrendered easily because of the political price for appearing to be weak, or selling out the public interest. While resolution can be by full or partial payment or by litigation, in practice, the default is litigation, followed by protracted appeals. Political and civil decision-makers have no invested commitment — “skin in the game” — to push for an early settlement. Anyone who exercises judgement that results in settling for a lesser amount runs the risk of being subjected to ignominy and accusations of bias or corruption. For politicians, the reputational risk in not pursuing claims is very high. Even Arun Jaitley as finance minister, who was earlier Vodafone’s attorney and called it “tax terrorism”, did not or could not undo it. Further, many officials, including finance and tax authorities and politicians, behave as if they are obliged to defend the indefensible. They seem unaware that similar compulsions drive legitimate private sector concerns. Shareholders expect companies to prosecute fair claims and defend against unfair demands, and companies cannot give up prosecution or defence if they have reasonable chances of winning. In legal battles of attrition, if the government takes a stand that others consider unreasonable, the country pays, while lawyers prosper.

Awards against India include Cairn’s $1.7 billion, Rs 22,100-crore tax claims against Vodafone that was disallowed by an international court (with legal costs of about Rs 85 crore to be paid), and possibly Vedanta’s claim of $3 billion related to Cairn’s transaction that is pending but could be upheld. India’s appeals against Vedanta’s and Vodafone’s awards are pending. If these appeals are dismissed, together with awards to Devas and its shareholders of $1.2 billion for the cancellation of its contract with Antrix, the total rises to over Rs 40,000 crore.

The government has resisted Devas’ awards successfully for years, and has raised the accusation of fraud in a still pending arbitration with Deutsche Telekom, a former investor in Devas. Meanwhile, internally, the government has probed these accusations repeatedly, and apparently accepted that they are unwarranted. (1)

If this defence fails and/or if there is actual seizure of assets abroad, India may be forced to reconsider. Accepting the awards is also not easy, because it needs radical changes in the government’s approach and behaviour, carried through by changes to all of society/us, in adhering closely to terms. Governments everywhere are sometimes not transparent, and ours has a colonial and feudal legacy of rulers and subjects with pernicious practices on both sides. It is a legacy that has become worse with time, and perpetuates problems in many areas of governance, the economy, and society, because it is pervasive. This mindset will have to change for a more open approach, objective analysis, and decisions based on facts and reason. If this process is begun, it augurs well for our prospects. Cairn, Vodafone, and Devas have reportedly shown willingness to settle. The government should seriously consider evaluating the pros and cons of asset seizure and indirect damages, compared with other options, including possible settlements. By ending these disputes quickly and well, we can hope to build a more reasonable and stable business and investment environment, and better business practices.

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Shyam (no space) Ponappa at gmail dot com

1.a: This article summarises the details: https://thewire.in/government/india-isro-arbitration-antrix-devas

1.b: India’s treaty-based disputes: https://investmentpolicy.unctad.org/investment-dispute-settlement/country/96/india