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EGoM’s decision on spectrum levy leaves room for arbitrage

Jan 28 2014, 05:51 IST
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SummaryThe decision, which now needs to be ratified by the Union Cabinet, has resolved the uncertainty around the auctions, which begin on February 3.

The empowered group of ministers (EGoM) on telecom on Monday approved a uniform spectrum usage charge (SUC) of 5% of an operator’s adjusted gross revenues on all new airwaves bought at an auction. Incumbent operators like Bharti Airtel and Vodafone will now have to pay a charge that is the weighted average of 6% on existing spectrum of 10 MHz and 5% on new spectrum.

The decision, which now needs to be ratified by the Union Cabinet, has resolved the uncertainty around the auctions, which begin on February 3. However, the efficacy of the new formula will be proved only once the department of telecommunications (DoT) puts in place a system that can segregate revenues from broadband wireless access (BWA) services spectrum and 2G airwaves.

The decision is broadly revenue-neutral for operators as well as the government. A Bharti Airtel or a Vodafone will pay a charge that is the weighted average of the current charge on existing spectrum and 5% on any new spectrum. Their levy would come down to 5.6% in a circle like Delhi where they hold 10 MHz spectrum from 6% currently.

While a new operator must pay an SUC of 5% against the current 3%, the charge will not go up as it buys more spectrum in future.

The government currently earns a pan-India average SUC of 4.8%. With the charge now at 5%, there will be no adverse impact on revenues.

The EGoM decided to continue with an SUC of 1% for BWA spectrum since it did not want to violate the government’s contractual obligation as per the bid conditions of 2010. However, BWA operators like Reliance Jio and Bharti Airtel will have to pay an SUC of 5% for the new airwaves they acquire and will need to report separately the revenues earned from BWA airwaves and new spectrum.

According to sector analysts, segregation of revenues could be difficult, leaving those operators that own both spectrum bands with room for arbitrage. The problem arises because today there are smartphones that can work across both the bands. A similar issue had cropped up before the DoT in 2008 while deciding the SUC for 3G spectrum; an internal panel then had ruled that segregation of revenues between 2G and 3G services is not possible because of similar inter-working of phones and SIM cards across the two technologies. The only possible solution to check such inter-working is to lay

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