No cash flow relief if 3% floor rate is not removed: Telcos cry foul as spectrum payment floor rate stays

No cash flow relief if 3% floor rate is not removed: Telcos cry foul as spectrum payment floor rate stays

22 Jun    Finance News

Telecom operators have told the department of telecommunications (DoT) that abolishing spectrum usage charge (SUC) in the upcoming 5G auctions and beyond will be meaningless if the government does not remove the floor rate of 3% on such payments which is applicable on current holdings. The floor was fixed in 2016 to protect government revenues as SUC at that time was lowered as an incentive to participate in auctions.

The operators told DoT officials at a pre-bid conference on Monday that the notice inviting applications (NIA) for the auctions does not mention the removal of the floor rate of 3% SUC levied on their adjusted gross revenue.

The removal of the floor rate is required to give effect to the telecom relief package announced by the government in September 2021, where apart from providing a four-year moratorium to operators on their AGR and spectrum dues, the government had also said that there would be no SUC on airwaves acquired in future auctions.

If the floor is not removed, and operators are asked to pay nil SUC on spectrum bought in 5G auctions, they would have to segregate revenues from different spectrum bands, which is technically not possible. In the past, a DoT committee has said that the same spectrum bands are used to provide different services, so segregation is not possible and, if allowed, there’s a high chance of arbitrage with operators showing revenues in bands where the SUC is lower or zero.

For instance, 4G spectrum currently with operators will be used for 5G services once they acquire more spectrum in the latter band in the upcoming auctions. “How is it possible then to identify which spectrum, acquired when, is being used for providing which services,” industry executives asked.

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Though the telecom package talks of scrapping SUC only on spectrum acquired in future auctions like that of 5G, if the floor is abolished, as and when operators acquire more spectrum in future auctions, their SUC will become zero on the entire holding.

Currently, there’s a complex weighted average formula to calculate the SUC of operators who have a mix of administratively allocated spectrum and those acquired through auctions. Reliance Jio, which has its entire spectrum from auctions, pays a flat 3% SUC on its entire spectrum holding, but operators like Bharti Airtel and Vodafone Idea pay between 4.5-5% as they have a mix of two.

The weighted average formula was designed such that with time as operators acquire more spectrum in auctions, their SUC would come down from say 4.5-5% to 3%. It could thus have gone even below 3% over a period of time as the quantum of auctioned spectrum grew, so to protect its revenue, the government fixed a floor of 3% in 2016.

“The weighted average of SUC rates across all spectrum assigned to an operator (whether assigned administratively or through auctions or through trading) in all access spectrum bands, including broadband wireless access spectrum in 2300 MHz/2500 MHz band acquired in the 2010 auction, shall be applied for charging SUC subject to a minimum of 3% of AGR excluding revenues from wireline services,” reads the DoT’s notification on the subject.

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