With AGR definition unresolved, CAG audit of telcos of little help

Written by fe Bureau | New Delhi | Updated: Jan 13 2014, 09:17am hrs
With the Delhi High Court last week empowering the Comptroller and Auditor General (CAG) to audit the revenue receipts of private telecom companies to ensure that no under-payment of licence fee to the government is taking place, the focus would once again shift to an unresolved issue that is pending before various courts in the country. Telecom operators and the government are at odds over what constitutes adjusted gross revenue (AGR), and until the definition is clear, the issue of under-reporting or payment cannot be settled.

The department of telecommunications (DoT) had raised a total demand of around R1,500 crore from the countrys top five mobile operators for under-payment of licence fee during 2006-07 and 2007-08. The matter is stuck since then as virtually all operators challenged the demand notices in various courts and obtained stay orders.

The findings of under-reporting of revenues leading to under-payment of licence fee to the government emanated from a special audit ordered by the DoT on all the operators. It was found that while an operator had concealed revenues by booking voice revenues under data, which attracts a lower revenue-share fee, others had shown lower adjusted gross revenue by claiming that certain revenue streams did not constitute earnings from telecom services.

Mobile operators pay an annual licence fee to the government based on their AGR. For instance, for unified access services the licence fee ranges between 6-10% of the AGR depending upon the circles. For other services, like internet and national and international long-distance calling, it is at 6% of AGR.

Theres a dispute between the operators and the government over what constitutes AGR the operators maintain that revenues not accruing from telecom services like sale of bundled handsets, earnings from fixed deposits, rentals and forex earnings among others do not fall under AGR. The Supreme Court is also hearing a petition on this issue.

The special audit was ordered by the DoT in 2009-10 based on a letter by the Telecom Regulatory Authority of India (Trai) in 2008. Trai, to which all the operators submit their AGR and other subscriber and revenue-related details, felt there was some under-reporting by some firms and wrote to the DoT to get their books audited by its finance wing or an external auditor to check whether it was causing losses to the exchequer.

In their detailed reports, the special auditors stated that, in all cases, there was an under-payment of licence fees to the government due to lack of clarity on the definition of AGR and specific items that need to be considered while calculating the revenue of the operators. The audit also revealed that the operators did not include income from some ventures like sale of handsets bundled with voice calls, lease of mobile towers.

In Vodafone's case, for instance, the auditor, SK Mehta and Co, in its report said that the companys liabilities include Rs 120 crore as licence fee and Rs 68 crore as spectrum charges totaling to Rs 188 crore. It added that Vodafone saved Rs 93 crore in spectrum charges and licence fee on discounts to distributors and Rs 32 crore by not paying levies on reimbursements on cellsite expenses. Moreover, Vodafone also saved Rs 21 crore by not paying levies on imputed interest on interest-free loans and Rs 9 crore on forex earning, the auditor said in its report.

Telecom players involved in the audits have vehemently denied all allegations of under-reporting or misreporting revenues.

In Bharti Airtel's case, the auditors Contractor, Nayak & Kishnadwala had found a gap of Rs 98 crore on account of margins given to distributors of pre-paid cards. However, the auditor had left it to the DoT to decide whether there was any violation in this regard.

A similar audit conducted on Reliance Communications by Jaipur-based Parakh & Co found that the company had failed to show revenues of Rs 2,799.19 crore, causing losses of Rs 316 crore to the government in terms of licence and spectrum fees. RCom had subsequently challenged the findings of the report.

In Idea Cellular's case the auditor Chhajed & Doshi had said that the service provider may have to pay Rs 74 crore to the government. However, it added that the liability arose due to lack of clarity on several issues such as whether telcos should share revenues on income from insurance claims, unrealised exchange gains and interest income from subsidiaries.