The possible default by Vodafone Idea in paying its adjusted gross revenue (AGR) dues and dwindling state of India’s telecom sector for some time now implies that it’s time the government wakes up and smells the coffee. After all, India’s growth in the last two decades has been fueled by one key sector – telecommunications – that became the foundation of every other business in the country today.
The imminent risk of Vodafone Idea’s shutting shop as suggested by the company – is not the kind of scenario India ever wanted. For its repercussion on the telecom, banking sectors in particular and the economy in general can be serious. Experts have already anticipated the telcos’ exit could increase India’s fiscal deficit by 40 basis points (bps) and reduce the country to a duopoly. Besides, the large magnitude of debt default, job losses and customer annoyance is unthinkable, leave alone the possibilities of 5G networks that would anyway remain a distant dream.
In this context, it needs to be mentioned that unpaid government dues is nothing new in the enterprise world. So why is the government pushing its once upon a time glorious telecom businesses into crushing debt and possible bankruptcy, instead of ensuring the sector remains healthy and competitive?
Unpaid dues to the govt is not uncommon
Take for example, Facebook that is facing a lawsuit from the US Internal Revenue Service, which claims the social network owes $9 billion in unpaid taxes, according to Reuters. That lawsuit went to trial in a San Francisco court on Tuesday, and the crux of the case is a 2010 deal between Facebook and an Irish subsidiary it uses to shuffle money around internationally. The IRS alleges Facebook undervalued the intellectual property it sold to the subsidiary, thereby dodging billions in taxes.
Facebook CTO Mike Schroepfer, AR and VR chief Andrew Bosworth, and three other Facebook executives will be called to testify, Reuters reports, and Facebook expects the trial to last three to four weeks.
Many giant tech companies shelter billions from taxes by keeping their money in Ireland because of the country’s low corporate tax rates. That often involves creating Irish subsidiaries that license out proprietary technology, trademarks, and other company property for which the subsidiary then pays royalties. The IRS claims Facebook undervalued the royalty amount between 2010 and 2016, which cut the company’s domestic tax bill as the royalties are ultimately reported as income.
In a statement provided to The Verge, Facebook’s Berti Thomson said, the company “stand[s] behind” the 2010 transaction, which it says occurred when the company had no mobile ad revenue, a “nascent” international business, and when its “digital advertising products were unproven.”
In recent years, some government entities have taken action against the practice. In 2016, the European Union ordered Apple to pay $15.4 billion in back taxes to Ireland after ruling that Apple had received illegal tax benefits from the country. Apple finished paying back those taxes in 2018, though it and Ireland appealed the decision in court last year.
In September, Google said it would pay more than $1 billion after a French investigation into its tax practices. And last December, Google said it would stop taking advantage of the so-called “Double Irish” and “Dutch sandwich” tax loopholes that allowed it to move overseas funds from Ireland to the Netherlands and Bermuda, and effectively shelter it from taxes.
Coming to the Indian telecom scenario, Vodafone Idea’s business in India is in dire straits after the Supreme Court ordered it to immediately pay billions in unpaid government dues and interest. On Monday, Vodafone paid Rs 2,500 crore to Department of Telecommunications (DoT) and promised to pay another Rs 1,000 crore before the end of the week. But the amount paid for now is less than 5% of the dues that the DoT estimates the company owes to the government.
However, as Mukul Rohatgi, senior counsel for Vodafone Idea told news reporters if the telco pays all its pending dues to the government overnight, it will have to close operations in India.
in November 2019, Chief Executive Nick Read said that in India, where Vodafone formed a joint venture with Idea Cellular in 2017, had been “a very challenging situation for a long time”, but Vodafone Idea still has 300 million customers, equating to a 30% share of the sizable market.
Meanwhile, Bharti Airtel and Tata Group also made part payment of their dues Rs 10,000 crore and around Rs 2,197 crore, respectively. While Bharti Airtel has to pay nearly Rs 25,586 crore more to the government, Tata Teleservices still owes Rs 13,800 crore to the government. The Apex Court has set the deadline for all the payments on March 17.
So what should the government do at this juncture?
Former finance secretary Subhash Chandra Garg has addressed the state of the telecom industry in India as ‘broken’ suggests in an extensive blog post that the government can offer a one-time settlement scheme to telecom companies, encourage the transfer of spectrum from telecom companies that have closed or are closing shop by discarding AGR-based fees on the value of spectrum to be sold, abort the revival plan of BSNL and MTNL and make the cost of 4G spectrum (which BSNL has yet to tap into) affordable and encourage investment in 5G services.
In other words, the government should step in and save the telcos as telecom networks are at the heart of our digital future. We should not forget that the intense competition in this sector until now ensured that consumers got the tariffs and offers.
Nearly 500 million users in India have changed their operator so far using mobile number portability only because there were multiple operators vying to offer services. Also, In the current scenario, if Vodafone Idea exits, foreign investors will think twice to make international arbitration anymore. Investment by existing operators into the new infrastructure that could power India’s future such as 5G too would look unlikely in the near future.
India is expected to have over 900 million internet users by 2023, up from 500 million now. It is a large enough market for three private players and one public sector company. Therefore, experts believe it is important to ensure Vodafone Idea survives. With already massive erosion of value and job losses, another exit now would sound the death knell for the sector. In this context, the Center has rightly announced a Rs 70,000-crore package for BSNL and MTNL to keep the public sector firms floating.
A similar package must be offered to save Vodafone Idea, instead of highlighting on the debt factor. This could also be the government’s best bet at regaining telecom sector’s growth momentum and can revive the economy on the whole.