Relief Package To Telcos: For Once, A Retrospective Amendment Would Be In Order

The government’s reported relief package for the stressed telecom sector is a sort of penance for its overreach and avarice and hence welcome.

It includes a four-year moratorium on adjusted gross revenues (AGR) and spectrum payments, lowering the spectrum usage charge (SUC) and redefining AGR to exclude, prospectively, non-telecom revenues besides allowing Telcos to surrender unused spectrum.

The two financial engineering solutions envisaged are conversion of a part of the dues into equity and sale and lease back of spectrum which at best could be palliatives.

It is the olive branch on AGR that rankles as being insincere. To say that in future i.e. prospectively we will not put a shovel into your non-telecom revenues is not only making a virtue of necessity but a half-hearted and incomplete penance.

For, the Department of Telecommunications (DOT) was clearly at fault when in 2001 the revenue sharing agreements — to which the Telcos were made to switch — went beyond telecom revenues.

Consider a license agreement between a patent holder and the licensed user of the technology embodied in such patent.

If the agreement envisages a 5 per cent royalty, obviously the licensee would have to pay 5 per cent of sale of the medicine that is the subject matter of patent and not on its entire sales turnover.

Likewise, DOT cannot eye with covetous eyes anything beyond telecom revenues, but its perverted definition of AGR did precisely that and roped in dividend, interest, rent, capital gains and what have you of the Telcos.

That the Telcos signed on the dotted lines without demur was of course a monumental blunder, but to ask someone to stew in his own juice is unreasonable.

It is sad that even the Supreme Court did not allow the DOT to make amends for its overreach when it in a belated gesture offered to do so in 2020.

The central government should show magnanimity by not only providing for a four-year moratorium but retrospectively recalculating the revenue share payable by Telcos targeting only their telecom revenues, period.

The government last month showed magnanimity by withdrawing the retrospective amendment to the income tax law to target capital gains earned abroad which had riled Telco Vodafone in particular no end.

The retrospective amendment was made in 2012 following the Supreme Court verdict in 2011 absolving Vodafone of its vicarious capital gains tax liability in its representative capacity on behalf of Hutchison Hong Kong from which it had bought controlling interest in Hutch’s Indian telecom operations.

The retrospective amendment was to overrule the Supreme Court verdict in Vodafone’s favor besides targeting other foreign companies that were in the same boat — notably Cairns Energy UK.

Both Vodafone and Cairns had called in the arbitrator who ruled against the retrospective amendment and thus absolved them of tax liability.

The Indian government till last month had dug in its heels and clung on to its belief that these companies had resorted to the thinly disguised stratagem of tax avoidance by using tax havens to consummate share transfers giving rise to capital gains.

Its stand was self-righteous and principled — if the operating assets are in India, the shares representing them were also located in India, period.

But the omission to say so in so many words in the income tax law had impelled the Supreme Court to give a clean chit to Vodafone in 2011.

This omission was made good in 2012 through a retrospective amendment.

Last month, the Modi government decided to smoke a peace pipe with foreign companies by annulling the retrospective nature of the 2012 amendment both to be in the good books of foreign investors as well as to ward off the unseemly spectacle of Air-India planes being attached by Cairns.

The Indian government had confiscated the dividend that was to be repatriated to Cairns Energy UK from its Indian operations so as to collect the capital gains tax on share transfer.

Cairns threatened to match guerilla tactic with its own guerilla tactic. Mercifully the standoff has ended.

The point is the same magnanimity should be shown by the Modi government in owning up its mistake in reaching out to non-telecom revenues of Telcos.

Retrospective change to the definition of AGR is in order. Retrospective amendments are not kosher if they are going to put a fresh shovel into someone’s revenue, but if they are going to have the reverse effect, they are welcome.

So the Modi government, which rightly and discreetly withdrew the retrospective nature of the 2012 amendment to reach out to capital gains earned abroad in respect of operating assets located in India, should now make a retrospective change to the definition of AGR, even if the bottom line is return of a substantial portion of revenue share it has already received from the Telcos.