Indian telcos face setbacks after Supreme Court license fee ruling

The Indian Supreme Court has ordered telcos to consider license fees paid as capital expenditure and not as an expense, leading to an additional tax liability. This is especially the case for older telcos Bharti Airtel and Vodafone Idea.

The judgment overrules the previous Delhi High Court order that categorised license fees before July 31, 1999 as capex and as expenses after that date. The telcos are likely to appeal it.  

In simple terms, the judgement means that telcos will now need to deduct a part of the license fee each year instead of deducting the entire amount in one go. Indian telcos pay two types of license fees, initial fee for license acquisition and a recurring yearly payment, which is calculated based on their adjusted gross revenue (AGR). 

For Bharti Airtel, the added tax burden can go up to 60 billion Indian rupees ($720 million) for a 20-year period from 1999 to 2019. While the accounting changes will lead to higher taxes initially, it is likely to largely even out over the entire license holding period of 20 years.

"This pivotal ruling fundamentally restricts telecom operators from categorising their annual obligations for license fee payments as operating expenses, thereby disallowing them from deducting these fees from their gross revenues when calculating their EBITDA. The EBITDA figure plays a crucial role in determining their tax liability, factoring in interest expenses and depreciation costs," says Parag Kar, former vice president for government affairs, India and South Asia, Qualcomm, in his blog. 

High taxation

This decision was largely unexpected because of the previous High Court ruling. The change will involve unscheduled expenses for the telcos and they may also need to invest in changing their accounting processes. 

Indian telcos have been complaining about the high taxation and levies for sometime now. Earlier this year, the Cellular Operators Association of India (COAI) demanded that the license fee be brought down to 1% from the current 3%. 

Higher taxation is all the more problematic considering the telcos are already under massive debt. According to the Investment Information and Credit Rating Agency (ICRA), Indian telcos had a debt of around INR6.3 trillion ($75.73 billion) at the end of the 2022-23 financial year. Moreover, the telcos have made significant investments in deploying 5G networks at a time when the path to their monetization is not very clear.