Evolution of 5G ecosystem to take 18-24 more months: Rajan S Mathews

As the government moves towards finalisation of the new telecom policy this year, the Cellular Operators Association of India (COAI), the apex industry association that represents Indian mobile operators, feels its time there is predictability and stability in government policy. The COAI has asked the government to put in place a number of enabling policies to ensure that unnecessary hurdles do not come in the way of the country leaping ahead of the world when it comes to technology, while working towards 70 per cent broadband penetration by 2020. Spectrum, the sector’s raw material, needs a policy where the nuances and major points of conflict are dealt with conclusively. This will allow telecom to plan, use and execute national resources efficiently. In an interview with Anjana Das, COAI director general Rajan S Mathews says as far as 5G goes, the auction should be held after 18-24 months when the ecosystem, the regulatory and technical standards are in place.

What are your expectations from the Union budget?

COAI, as the key industry body representing the telecom sector, has made a number of recommendations to the government, towards improving the financial health of the industry through the Union budget. Some of the major submissions include:

1) Reconsideration on issues around taxability of right of way (RoW):

RoW rules were brought in to ease setting up telecom infrastructure by standardising processes and fixing applicable charges. Telcos pay a fixed tariff to agencies like municipal corporations for permission to build towers and lay optical fibre on public land. These agencies do not pay taxes on these charges, as that would amount to taxation of land and buildings on which they have exclusive taxation powers. The income of state government cannot be subject to union taxes. The central government’s investigation against such agencies to recover taxes, are making these agencies in turn, pressurise telcos into paying taxes due with interest and penalty. This adds to the financial woes of the industry and leads to unnecessary and financially draining litigation. We have recommended that the government clarify that provisions of RoW are in relation to discharge of functions specified in XI/XII Schedule of the Constitution, and hence covered under the relevant exemption in favour of government departments and hence there is no liability of service tax/GST on such transactions.

2) Tax withholding on distributors’ margin on SIM cards and prepaid vouchers:

Telecom companies transfer prepaid vouchers and SIM cards (representing ‘the right to receive prepaid services’) to independent distributors at a discount, who further sell it to retailers or subscribers. Distributors are not agents of telcos, so discount does not qualify as commission as under section 194H of the Act. No payment/credit towards the discount allowed to the distributors is made by the telcos. Therefore, discount extended to the pre-paid distributors is not subject to tax withholding. However, authorities have adopted a contrary position and the matter is presently pending adjudication before the Supreme Court. Given the quantum involved, we request that this issue be addressed by rationalising the tax rate or necessary clarification. As this is a matter that needs immediate attention, we have recommended that the authorities understand that the discount extended to pre-paid distributors is not commission. However, in order to bring the ongoing litigation to an end, given the low margins earned by the distributors, a lower withholding tax rate of 1 per cent may be prescribed for telecom distributors.

3) Customs duty exemption for LTE equipment required for 4G network and telecom devices 

Penetration of telecom network till now was aided by customs duty exemptions given to 2G and 4G-network equipment, which helps in reducing cost for the consumers. Unfortunately, the government has withdrawn customs duty exemptions on telecom equipment towards promoting local telecom equipment manufacturing. However, the scale and quality of equipment needed by the sector is not yet globally comparable and widely available in the country, so the telcos will have to pay a higher price to import the equipment. 

What is your feedback to the new telecom 

policy (NTP)?

The NTP document is a framework document that defines the direction in which all telecom policy must move. It is an opportunity for the government to bring in much-needed fundamental changes that the sector needs at this time for restoring its financial health and resuscitating it. It must be bold, forward looking, encourage investments and help maintain financial stability of the sector. There has to be predictability and stability in government policy and we have asked that the government put in place a number of enabling policies to ensure that unnecessary hurdles do not come in the way of the country leaping ahead of the world when it comes to technology in the coming years, while working towards 70 per cent broadband penetration by 2020. Spectrum, the raw material of the sector, needs a policy, where the nuances and major points of conflict are dealt with conclusively. This will allow the sector to plan, use and execute national resources efficiently. Moreover, the service providers should be allowed access to satellite spectrum for any application, i.e. V-SAT, Direct to Home (DTH), teleport or any other form of telecom services.

Trai is in the midst of a consultation process on spectrum auction, pricing and timing. What are your views, especially on 700 Mhz and 5G spectrum pricing?

The sector is currently going through one of its worst phases since inception, as far as its financial health is concerned. Service providers are struggling to manage a cumulative debt of around Rs 4.6 lakh crore. Credit ratings agency ICRA expects that sector revenues will fall 6 per cent this financial year and Ebitda will fall as much as 28 per cent. The financial crisis is leading to severe cost cutting and consolidation, leading to considerable amount of uncertainty in the sector, including loss of jobs and employment. The industry will need some time to settle before being able to spend on spectrum at another auction. Hence, we feel the government need not rush into another spectrum auction this year. We feel the industry will not be ready for another auction before 2019. By this time all the consolidation would be concluded and the industry would be in a better position to spend on additional spectrum. As far as 5G goes, the regulatory and technical standards are still in the process of deliberation and consultation, globally. It is only when there is an ecosystem for the technology, where services and apps that can work on all bands, that there should be an auction. This will take another 18-24 months. It will allow for a better understanding of value of 5G spectrum and the resultant price to bid.

In the October 2016 auctions, no bids were received for 700 MHz spectrum band. This means that the reserve price of 700MHz band needs to be revisited after carrying out a full-fledged bottoms-up evaluation, which analyses market conditions, revenue opportunities and market demand and supply.

Q3 may see telcos bleeding further on numbers due to impact of internet user charges (IUC) cuts and stiff competition. When do you see the industry rising from the ashes of losses and dip in revenues?

We expect that the ongoing consolidation in the industry will take another 2-3 quarters to conclude. Once this happens, the newly emerged entities will have to synergise their operations and make them as efficient as they can be, while operating in a hyper-competitive market. The reduced number of players will reduce the hyper-competition, and may give the telcos some room to launch differentiated and innovative services and offerings to the consumer, but we don’t expect any major shift in finances for some time – at least till the government steps in with the much-needed steps to rejuvenate the industry as a whole. The current reduction in IUC is bound to impact the industry. However, the COAI does not make specific comments on the issue as IUC is the subject of mutual arrangements between the telecom service providers (TSPs). 

What’s the ideal tax structure for the Indian telecom industry in terms of spectrum and license fees?

The industry recommends that the Universal Service Obligation Fund (USOF) contribution be immediately brought down to 3 per cent, with an ultimate objective of doing away with the levy in the next 2-3 years. (USOF constitutes 5 per cent out of the LF of 8 per cent). Reduction in spectrum usage charges (SUC) to a uniform rate 1 per cent across all bands.

What are the challenges in 2018?

The key challenge at this time remains improving the financial health of the sector and creating funds for supporting the rollout of robust infrastructure expansion across the country to provide seamless connectivity to the consumers. We submit that immediate cogent steps towards resolving this should be taken. Even the Prime Minister’s Digital India plan is almost completely dependent on a thriving telecom sector. But in the current scenario, with the ability to attract investments significantly affected, the ability of the telcos to invest in expanding existing networks and services and introducing new technologies is becoming almost impossible. Over Rs 3 lakh crore is required to be invested in the next couple of years for continuous innovation and infrastructure rollout pan India.