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Revenue Review - TRAI redefines AGR calculation

October 15, 2006
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The Telecom Regulatory Authority of India (TRAI) has redefined the calculation of telecom operators' adjusted gross revenue (AGR), in line with the directive of the Telecom Disputes Settlement Appellate Tribunal (TDSAT). Operators, who pay between 6 per cent and 10 per cent of their AGR annually to the government under the existing licence conditions, had found the present system of calculation "unfair" and have for long been demanding that all non-service revenues be removed from the definition of AGR.

In compliance with the TDSAT directive, TRAI undertook the exercise of finding out which component of the AGR, as defined in the conditions of the licence, deserved to be retained and which could be excluded. In drafting its recommendations, TRAI followed broad criteria such as revenue accruing from both direct and indirect activities under the licence, exclusion of revenue from verifiable nonlicensed activity, proper audit for items to be excluded from AGR, revenue from bundled sale of goods and services to be a part of AGR unless sale is clearly discernible and services offered remain unaltered even on a standalone basis.

Noting that the definition of AGR could vary from service to service and that its assessment would require deft accounting skills, the regulator has divided its recommendations into two main categories –­ to be included in AGR or not included.

According to this, revenue from sale of goods, rendering of services yielding interest, and royalties should be calculated under the AGR. For instance, TRAI has included bad debts in the calculation of AGR, while only the interest calculated on refundable deposits will be added to it instead of counting the entire interest earned. Further, TRAI recommends that income from sale/lease of passive infrastructure like towers, dark fibre, etc. should be part of the AGR. Receipts of revenue on account of access deficit charge (ADC) should also be part of it.

TRAI further recommends that revenue from reversal of vendors' credit and other income, including miscellaneous earnings from sale of tenders, directories, forms, forfeiture of deposits/earnest money, management and consultancy fees and training charges from the telecom service should form part of the AGR.

What may cause a stir among the operators is the recommendation that revenue from handset sales or telecom equipment bundled with telecom services should be included in the AGR. It has, however, excluded revenue from discernible and standalone sale of handset or telecom equipment, not bundled with the telecom service.

On interconnection charges, TRAI states that since it is pass-through revenue and the service provider is only collecting interconnect usage charges (IUC) on behalf of other service providers, inclusion/exclusion of this item in the AGR should be on an accrual basis. Again, regarding service tax, TRAI has recommended that since this is not revenue for the service provider –­ which is only a collecting agency on behalf of the government –­ its inclusion/exclusion should be on an accrual basis. The advantage of allowing accounting of service tax and IUC on an accrual basis is that these would be easily verifiable from the annual accounts of the service providers, states TRAI. Also, even though income from dividend is part of the revenue, TRAI asserts that it does not represent revenue from the licensed activity and therefore should not be included in the AGR. It has also excluded revenue on account of profit on sale of assets and securities. The regulator has recommended that revenue from sale of immovable property, securities, warrants or debt instruments and other fixed assets should be excluded from the AGR calculations unless there is verifiable data. It has also added that any revenue on account of foreign exchange fluctuations should not be part of the AGR.

However, it has included revenue from TV uplinking and internet services, excluding payment for port, leased line and bandwidth charges; rent for sharing of infrastructure or any other payment to other licensees from the AGR.

On receipts from the Universal Service Obligation (USO) Fund, the Department of Telecommunications has already expressed a view that these should not to be part of the AGR. TRAI recommends that necessary amendments should be made in the licence to make this clear. The USO Fund is mainly utilised for implementation of the government's recognised projects and policy inducement.

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