AUSPI Presentation to TRAI 7 th August 2006

AUSPI Presentation to TRAI 7 th August 2006 1

• Background • Principles • Items to be included/excluded from AGR 2

Back Ground • A proper definition of AGR is imperative as licensed operators are required to pay license fee based on a revenue share as per provision of NTP-99 • The present definition of AGR includes several revenue streams not related to service activities of licensees such as the following: (1) (2) Dividend income from investments (3) Revenue from sale of handsets (4) Sale of other assets (5) Revenue from sale of capital goods (6) Capital Gains (7) • Interest income from investments Other miscellaneous revenue not from the telecom service Accurate definition of AGR to avoid issues on double charge, unrelated activities. The present definition is against the fundamental rule of accounting – “if any income is charges to a tax / levy, then the underlying expenses incurred to earn such income must also be allowed as a deduction” 3

Principles 1. Revenue should include that income which is derived from the licensed activities. Any income from non licensed activity should not be included. 2. Revenue should include income from users of telecom services /sale or lease of bandwidths or receipt of revenue from value added services as permitted under the license. 3. Whatever essential expenses are incurred in the process of providing licensed services should be deducutible. 4

AGR should include only the revenue accrued out of licensed telecom services and should not include income from non-telecom sources such as: • Revenues from other telecom licences like ISP should not be included in UASL revenues as ‘Other Income’. • Interest and treasury income of any type. • Dividend. • Sale proceeds of assets/handsets/equipment/scraps • Management fees, consultancy fees, training fees (these do not require telecom licence). • Forex gains • USO subsidy • Miscellaneous income including Sale of scrap, notice pay received from employees 5

Cont’d…. • Property rent • Capital gains. • Reversal of any provisions/vendor payments • Earnest money/deposits furnished by third parties (excluding customers of telecom services) which are forfeited by the LICENSEE company for violation of contract/s • Insurance claims for damaged/lost/stolen assets • Revenue collected on behalf of any other nonlicensee company • Reimbursement of costs/expenses received from other companies. 6

Deductions/ exemptions to be permitted: • Payments for port and leased line charges, bandwidth charges, rent for sharing of space, power and any other payments to any other licensee • Pass-through IUC & ADC on accrual basis instead of payment basis. 7

Cont’d…. . • Payments to VAS/content vendors • All discounts/adjustments/waivers • Writing off bad debts • Payments to WPC for MW links & spectrum charges • Service tax should not be added to AGR neither on the revenue side nor on the expenditure side. • Payments to obtain Bank Gurantees. 8

Why non telecom revenue should be excluded from AGR? • Any receipt from sale of handset, accessories etc should not be included in the AGR as the licensee himself purchases these items which are sold either at the same price or by adding a small mark up. This doesn’t require telecom licence. • Receipts from sale of capital goods are miscellaneous income not derived from the provision of telecom services. No revenue share should be payable on this amount in the form of licence fee. This doesn’t require licence. 9

Cont’d…. . Inclusion of bad debts in the AGR amounts double burden on the company since the company has been unable to recover the amount from its subscriber and in addition, it required to pay a license fee from such unrealised amount. If revenue has not been collected, licensee should not suffer incremental cost of license fee on bad debts. 10

Cont’d…. • As waivers and discounts are adjustments given to subscribers do not actually accrue as revenue to the licensee, the operators should be allowed to “net off” such charges against revenues as these are actually deducted from the revenue. The government recognizes trade discounts given by trader as an allowable reduction for the purpose levying sales tax, which is levied on the amount actually collected after deducting the discount. • Service Tax should not be added in AGR neither in the revenue side nor in expenditure side. 11

Conclusion All telcom service providers have been granted licenses under Section 4 of the Indian Telegrph Act to offer a specified telecom service and accordinlgy it stands to reason that the annual license fee revenue share paid by these telecom service providers must be based on the revenue generated from that licensed activity. Hence AGR should exclude all revenues derived from non telecom licensed activities. 12

Contact us at : auspi@auspi. in 13