It was rather ironical that Prime Minister Narendra Modi declared at a BRICS summit at Brasilia that India was the world’s most open and investment-friendly economy on the day after Vodafone CEO Nick Read told a press conference that Vodafone India’s future was in jeopardy unless there was a stop to hitting the firm with taxes and penalties.
The next day, telecom joint venture Vodafone Idea declared India’s largest corporate loss ever for Q2 at Rs 50,922 crore. After the storm over his statement, Nick Read partly withdrew by apologizing for the misgivings that had been created by what he called out-of-context reporting; and that he and Vodafone stood committed to their India operations. The damage had been done, and it was probably intended that way. Nick Read deliberately chose an international mobile congress at Barcelona to underline Vodafone India’s possible liquidation. He said the firm had written down the value of the India unit to ‘zero’; and he was only confirming what the street had been talking about all these months — that a firm that was making losses at Rs 4,000-Rs 5,000 crore every quarter, would find it difficult to survive.
WHAT’S KILLING VODAFONE
The last straw that broke the camel’s back was the Supreme Court ruling last month that Adjusted Gross Revenue (AGR) included not only operational revenue the telcos earned, but also non-core revenue such as sale of assets and interest on deposits. This meant the license fees at 8 per cent and the spectrum usage charges at 3-5 per cent the telcos pay to the government would be calculated on this new AGR formula.
Effectively for the telecom sector, the dues, penalties and interest to be paid in three months to the government is estimated to be close to Rs 92,641 crore, 75 per cent of which is interest on principal and penalties. It’s a back-breaking impost for companies reeling under loss-making tariffs.
For Vodafone Idea, the hit is little over Rs 28,000 crore! The SC may be right in interpreting AGR. However, it took 14 years for the court to decide the formula after the Cellular Operators Association of India first filed the case in 2005. So why should the telcos pay the interest and penalties? Vodafone, which entered India buying out 67 per cent of Hutchinson Wampoa’s stake in 2007, paid $11 billion or over Rs 45,000 crore then to get into what was considered a galloping telecom market. It has since then, pumped in several billions of dollars more to buy expensive spectrum and offset losses. It main contention since then has been, and which deserves merit, is it had not counted on two things, which businessmen abhor: hidden costs and the lack of a level playing field.
RETROSPECTIVE IMPOST
The earlier impost in capital gains taxes was even more shocking, as a law was applied retrospectively to impose a demand of Rs 22,100 crore after the government lost in the SC. After the Hutchinson deal in 2007, Vodafone received a tax demand alleging it had failed to deduct withholding tax (TDS). The firm took it to SC, which upheld Vodafone’s interpretation of the Income Tax Act 1961. SC said the transaction in 2007 was not taxable in India, and that consequently TDS was not applicable.
The government side-stepped the court ruling by enacting the Finance Act 2012 to retrospectively tax a supposed gain on transfer of shares to Vodafone. Even though then Finance Minister Arun Jaitley flayed the ‘Vodafone tax’ as ‘erroneous’ last year, the dispute continues to linger before an international arbitration tribunal in London. Three years ago, in October 2016, these issues were highlighted by then Vodafone CEO Vittorio Colao. “We requested a predictable policy regime with a level playing field and a fair application of GST and other levies,” said Colao after meeting with then telecom minister Manoj Sinha.
These appeals, needless to say, have fallen on deaf ears, and Vodafone has watched itself sink with the Telecom Regulatory Authority taking a string of decisions that have been adverse to telecom operators, with the exception of Reliance Jio. The final equation: Vodafone and its partner, Idea, owned by Aditya Birla Group, have both said they would rather let the JV go bankrupt than infuse any more capital in a dying business. This leaves us with a two-horse industry. Jio and Airtel. Bharti Airtel has just declared a whopping pre-tax July-September loss of Rs 31,334 crore, and it is anyone’s guess how long it will last.
Does this scenario inspire confidence among offshore investors in India?A Committee of Secretaries is looking at possible reliefs for the debt laden telecom sector. There will be some waivers of penalty and interest. But undoubtedly, the Vodafone fiasco has left a black mark on India’s delivery record.